QIS 3 FAQ: P. Securitisations
(Updated 20 December 2002)
1. Paragraph 546 of the Technical Guidance contains a reference to a paragraph x. Could you tell me what paragraph it refers to?
Answer: The reference is to paragraphs 517 and 520.
2. The 'solver' embedded in the SFA Calculator does not seem to work properly. What should I do?
Answer: An alternative version of the SFA Calculator, which uses the 'goal seek' function embedded into the worksheet, is available from your supervisor. Please note that this is the only revision to the calculator-none of the calculations, cell references, etc. have been changed. The worksheet was created simply to assist those that may be having problems with the existing SFA Calculator.
3. Paragraph 570 of the Technical Guidance contains a reference to a paragraph 96. This reference seems to be incorrect. Could you give the correct reference?
Answer: The reference should be to paragraph 580.
4. We are having problems reporting securitisation exposures where credit risk has been transferred to a third party by way of guarantees or credit derivatives (e.g. in the case of synthetic securitisations). The QIS Instructions (footnote 17) indicate that where a bank "holds credit protection (e.g. a guarantee) against a securitisation exposure, the exposure [should] be included in the portfolio of the protection provider". Exposure amounts must be entered pre- and post-protection into the relevant worksheet. However, given that the applicable risk weights can vary anywhere up to a full deduction from capital (i.e. a risk weight of 1250%), there are insufficient available cells within the standardised approach worksheets in which to enter the pre-protection amounts. In the IRB worksheets, additional PD rows can in principle be inserted to accommodate the pre-protection exposures. However, a problem still arises in trying to decompose the pre-protection risk weight produced under the securitisation proposals into an appropriate PD/LGD that can be used to enter the pre-protection amount into the relevant IRB worksheet. How then should securitised (or tranched) exposures that are covered by guarantees or credit derivatives be entered into the QIS spreadsheets?
Answer: You are correct. Securitised exposures covered by guarantees or credit derivatives should be entered into the portfolio of the protection provider as described in the QIS Instructions (paragraphs 15.23-24 and footnote 17). As you indicate, there is a problem entering the pre-protection amounts of these transactions into the QIS worksheets, particularly for pre-protection amounts to which very high risk weights should be applied. This problem does not extend to the post-protection amounts, so the final capital calculations will not be affected nor does the issue extend to non-securitised exposures that are covered by guarantees/credit derivatives.
Thus, for securitisation structures originated by the respondent bank where credit risk is transferred to a third party via a guarantee or credit derivative follow the usual procedure laid down in the QIS Instructions. However, it will be necessary to make an adjustment when entering the relevant pre-protection amount into the portfolio of the protection provider. The full procedure is:
· Record the securitisation structure in full in the "Originators" securitisation worksheet.
· Within the securitisation worksheet, against the relevant tranches, record any amounts that are retained or repurchased by the bank.7
· Thus, for each tranche in the securitisation structure, to the extent that credit risk has been transferred from the respondent bank, zero should be recorded in the "retained" column of the securitisation worksheet. Where credit risk has been transferred by way of the sale of securities issued by a special purpose entity (i.e. a traditional securitisation) no further exposures need be recorded in the QIS workbook. However, to the extent that the bank has transferred credit risk by way of a guarantee or credit derivative on the underlying assets or against asset-backed securities that have been retained or repurchased, the respondent bank must still record its exposure to the protection provider.
· For all calculation methods reported by the bank, this latter exposure should be recorded in the portfolio of the protection provider.
· As with other guarantees and credit derivatives, under the standardised approach, the bank should report the protected amount against the risk weight of the protection provider in the post-protection column, e.g. if the protection provider is a AA-rated bank the post-protection risk weight would be 20% under the standardised approach. The bank should also enter the protected amount in the pre-protection column against the same risk weight. Note that although this departure from the usual procedure for protected exposures will mean the loss of some information about the magnitude of the credit mitigation effect, the post-protection capital calculation will still be correct.
· Likewise, under the IRB approaches, the bank should simply enter the protected amount against the estimated PD of the protection provider in both the pre- and post-protection columns rather than attempt to decompose the pre-protection risk weight into an appropriate PD/LGD.
· Finally, the respondent bank should be careful to avoid any double counting of exposures in the "Data" worksheet, i.e. in this worksheet the bank should be careful to report any protected securitisation exposures in the portfolio of the protection provider and only report retained, non-protected securitisation exposures in the securitisation portfolio.
Also, under the IRB approach the originator's maximum capital charge is capped at KIRB. The cap is given effect by a formula embedded in the summary table at the top of the "Originator" worksheet. As a simplification, however, this formula does not take account of the bank's exposures to third parties that have provided protection against its securitisation exposures. Where a significant misstatement of a bank's capital position results, this should be noted, together with an indication of the magnitude of the effect, in the "Notes" section of the QIS workbook.
5. Paragraph 539 explains how to calculate the capital charge when there is a maturity mismatch in the context of synthetic securitisation. How should the maturity of the underlying pool be determined when the assets in the pool have different maturities?
Answer: The longest maturity of the underlying assets should be taken as the maturity of the pool.
6. Please clarify how banks are to determine whether a position straddles KIRB? It would also be helpful to understand when the RBA or SFA are to be used.
Answer: Paragraph 560 indicates that the credit enhancement level (L) is important for determining whether a position exceeds the KIRB threshold. To be precise, a bank should look to both the sum of L and the thickness of the exposure (T). For QIS 3 purposes, the SFA calculator has been programmed to make the following calculations once a bank has provided the necessary inputs.
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If L+T ≤ KIRB (that is the securitisation exposure is less than the KIRB threshold), a bank must deduct the securitisation exposure. If L ≥ KIRB (i.e. the position exceeds the KIRB threshold), a bank should apply the RBA or SFA depending on whether the position has an external or inferred rating. If L < KIRB and KIRB < L+T (i.e. the position straddles the KIRB threshold), a bank is to treat the position as two separate exposures divided at KIRB, as explained in paragraph 561.
7. If a bank applying the IRB approach for its retail portfolio is incorporating the likelihood of additional draws in its LGD estimates, can the capital requirement go down to 0 if it securitises all of the drawn amount?
Answer: No. Separate EAD estimates must be calculated for drawn and undrawn amounts. In general only drawn amounts are treated as securitised exposures. The originating bank will assume the entire IRB capital charge for the undrawn exposures. The IRB securitisation framework would be available for the undrawn amount only to the extent that investors are obligated to cover losses on it. In this case, funded investor positions cannot simultaneously be used to cover drawn and undrawn exposures. See footnote 16 of the Second Working Paper on Securitisation (October 2002) for an additional discussion of this concept.
8. In the IRB treatment, what is the credit conversion factor for an eligible liquidity facility that is not meant to cover only a general market disruption?
Answer: Banks applying the IRB treatment of securitisations are to assign a 100% credit conversion factor (CCF) to eligible liquidity facilities that are available in events other than a general market disruption. This means that the bank must recognise 100% of the capital requirement generated under the supervisory formula approach (SFA) or ratings-based approach (RBA), as specified.
9. What is the treatment of off-balance sheet exposures that overlap and are provided to ABCP conduits and similar structures under the IRB treatment?
Answer: A bank may provide several types of facilities that can be drawn under various conditions. Some of these might qualify as "eligible" while others would be treated as credit enhancements. The same bank may be providing two or more of these facilities. Given the difference of triggers incorporated in these facilities, it may well be the case that this bank provides duplicative coverage to the underlying credit exposures. In other words, the facilities are to an extent overlapping since a draw on one facility precludes (in part) a draw under the other facility.
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For QIS 3 purposes, in the case of overlapping facilities provided by the same bank, the bank does not need to hold double the amount of capital for the overlap. Rather, it is only required to hold capital once for the position covered by the overlapping facilities (whether they are eligible facilities or credit enhancements). Where the overlapping facilities are subject to different conversion factors, the bank should attribute the overlapping part to the facility with the highest conversion factor. If overlapping facilities are provided by different banks, however, each bank should hold capital for the maximum amount of the facility.
10. How should an originating bank treat the seller's interest arising from a securitisation of revolving credits?
Answer: The seller's interest must be treated as an ordinary part of the seller's portfolio and must be risk weighted according to the rules applying to that category of exposure and recorded in the appropriate QIS spreadsheet. For example, if the underlying pool comprises retail exposures, banks using the IRB treatment for securitisation are required to capture the originator's interest in the spreadsheet pertaining to the minimum capital charges for retail loans.
11. When applying the IRB securitisation framework to a transaction with a 'seller's interest,' how should KIRB be calculated?
Answer: KIRB should be calculated as indicated in paragraph 501 and then multiplied by the percentage of the pool that represents the investor's interest.
12. How should the credit conversion factors for early amortisation features be applied under the IRB treatment?
Answer: Banks using the IRB treatment for securitisation will be required to apply a credit conversion factor to the proportion of KIRB for the off-balance sheet receivables (also referred to as the investors' interest) within a given securitisation. Banks will also be expected to hold capital against any retained exposures arising from the securitisation involving the assets comprising the investor's interest.
13. As originator do I have to include information about all the tranches in each securitisation, even those that are held by someone else?
Answer: Yes. The Committee is seeking to calibrate the approaches within the securitisation proposals and therefore would like tranche information on the whole transaction.
14. How should the effect of credit risk mitigation obtained on a specific securitisation exposure be calculated under the IRB treatment?
Answer: For QIS purposes, the following treatment would apply.
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When using the RBA, banks are required to apply the CRM techniques as specified in Part 2 Section II.B (Standardised Approach) of the Technical Guidance.
A similar methodology applies under the SFA. The bank may reduce the capital charge proportionally when the credit risk mitigant covers first losses or losses on a proportional basis. For all other cases, the bank must assume that the credit risk mitigant covers the most senior portion of the securitisation exposure (i.e. that the most junior portion of the securitisation exposure is uncovered).
Two examples of the proportional cover as well as two examples of credit risk mitigants covering the most senior portions are provided below for determining how collateral and guarantees are to be recognised under the SFA.
Illustrative Example Involving Collateral - proportional cover
Assume an originating bank purchases a € 100 securitisation exposure with a credit enhancement level in excess of KIRB for which an external or inferred rating is not available. Additionally, assume that the SFA capital charge on the securitisation exposure is € 1.6 (when multiplied by 12.5 results in risk weighted assets of € 20). Further assume that the originating bank has received € 80 of collateral in the form of cash that is denominated in the same currency as the securitisation exposure. The capital requirement for the position is determined by multiplying the SFA capital requirement by the ratio of adjusted exposure amount and the original exposure amount, as illustrated below.
Step 1: Adjusted Exposure Amount (E*) = max {0, [E x (1 + He) - C x (1 - Hc - Hfx)]}
E* = max {0, [100 x (1 + 0) - 80 x (1 - 0 - 0)]} = € 20
Where (based on the information provide above):
E* = the exposure value after risk mitigation (€ 20)
E = current value of the exposure (€ 100)
He = haircut appropriate to the exposure (This haircut is not relevant because the originating bank is not lending the securitisation exposure in exchange for collateral).
C = the current value of the collateral received (€ 80)
Hc = haircut appropriate to the collateral (0)
Hfx= haircut appropriate for mismatch between the collateral and exposure (0)
Step 2: Capital requirement = E* / E x SFA capital requirement
Capital requirement = € 1.6 * 20 / 100 = € 0.32.
Illustrative Example Involving a Guarantee - proportional cover
All of the assumptions provided in the illustrative example involving collateral apply except for the form of credit risk mitigant. Assume that the bank has received an eligible, unsecured guarantee in the amount of € 80 from a bank. Therefore, a haircut for currency mismatch will not apply. The capital requirement is determined as follows.
· The protected portion of the securitisation exposure (€ 80) is to receive the risk weight of the protection provided. The risk weight for the protection provider is equivalent to that for an unsecured loan to the guarantor bank, as determined under the IRB approach (Section III of the QIS 3 Technical Guidance). Assume that this risk weight is 10%. Then, the capital charge on the protected portion would be; € 80 *10%*0.08= € 0.64.
· The capital charge for the unprotected portion (€ 20) is derived by multiplying the share of the unprotected portion to the original capital charge. The share of the unprotected portion is: € 20 / € 100 = 20%. Thus, the capital requirement will be; € 1.6 * 20% = € 0.32.
Illustrative example - the case of credit risk mitigants covering the most senior parts
Assume an originating bank that securitises a pool of loans of € 1000. The KIRB of this underlying pool is 5%. There is a first loss position of € 20. The originator retains only the second most junior tranche: an unrated tranche of € 45. We can summarise the situation as follows:
1. Capital charge without collateral or guarantees
According to this, the capital charge for the unrated retained tranche, that is straddling the KIRB line is sum of (a) and (b):
(a) Assume the SFA risk weight for this subtranche is 820%. Thus, risk weighted assets are € 15 x 820% = € 123. Capital charge is € 123 x 8%= € 9.84
(b) The subtranche below Kirb must be deducted. Risk weighted assets: € 30 x1250% = € 375. Capital charge of € 375 x 8% = € 30
2. Capital charge with collateral
Assume now that the originating bank has received 25 Euros of collateral in the form of cash that is denominated in the same currency as the securitisation exposure. Because the tranche is straddling the KIRB level, we must assume that the collateral is covering on first place the subtranche above KIRB ((a) subtranche) and, only if there is some collateral left, the coverage will be applied proportionally to the subtranche below KIRB ((b) subtranche). Thus, we have:
The capital requirement for the position is determined by multiplying the SFA capital requirement by the ratio of adjusted exposure amount and the original exposure amount, as illustrated below. We must apply this for the two subtranches.
(a) The first subtranche has an initial exposure of € 15 and collateral of € 15, so in this case it is completely covered. In other words:
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Step 1: Adjusted Exposure Amount
E* = max {0, [E x (1 + He) - C x (1 - Hc - Hfx)]} = max {0, [15 - 15]} = € 0
E* = the exposure value after risk mitigation (€ 15)
E = current value of the exposure (€ 15)
C = the current value of the collateral received (€ 15)
He = haircut appropriate to the exposure (not relevant here, thus € 0)
Hc and Hfx = haircut appropriate to the collateral and that for the mismatch between the collateral and exposure (to simplify, € 0)
Step 2: Capital requirement = E* / E x SFA capital requirement
(b) The second subtranche has an initial exposure of € 30 and collateral of € 10, which is the amount left after covering the subtranche above KIRB. Thus, these 10 euros must be allocated in a proportional way to the 30 euros subtranche.
Step 2: Capital requirement = E* / E x SFA capital requirement
3. Guarantee
Assume now that instead of collateral, the bank has received an eligible, unsecured guarantee in the amount of 25 Euros from a bank. Therefore the haircut for currency mismatch will not apply. The situation can be summarised as:
The capital requirement for the two subtranches is determined as follows:
(a) The first subtranche has an initial exposure of € 15 and a guarantee of € 15, so in this case it is completely covered. The € 15 will receive the risk weight of the protection provider. The risk weight for the protection provider is equivalent to that for an unsecured loan to the guarantor bank, as determined under the IRB approach (Section III of the QIS 3 Technical Guidance). Assume that this risk weight is 20%.
(b) The second subtranche has an initial exposure of € 30 and guarantee of € 10. Accordingly, the protected part is € 10 and the unprotected part is € 20.
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· Again, the protected portion of the securitisation exposure is to receive the risk weight of the guarantor bank.
capital charge on the protected portion is € 10 x 20% x 8%= € 0.16
· The capital charge for the unprotected portion is derived by multiplying the share of the unprotected portion to the original capital charge. The share of the unprotected portion is: € 20 / € 30 = 66.7%.
capital charge on the unprotected portion is 66.7% x € 30 = € 20
(or equivalently € 20 x 1250% x 8%= € 20)
Total capital charge for the unrated straddling tranche =
€ 0.24 (protected portion, above KIRB) + € 0.16 (protected portion, below KIRB) + € 20 (unprotected portion, below KIRB) = € 20.4
15. How should CMBS be treated in QIS3 where the underlying assets are not loans but physical assets?
Answer: For QIS3 purposes, banks should look to their internal classification to decide whether this should fall under securitisation or any other exposure class. Banks should clarify how these transactions have been treated in the notes in the QIS spreadsheets.
16. If the underlying pool of assets is composed of specialised lending exposures and the bank is using the supervisory categories under the IRB approach to calculate the capital requirements for them, what LGD should the bank use under the SFA?
Answer: The bank should assume an LGD of 50% for purposes of calculating the capital charges under the SFA.
17. How should currency swaps and interest rate swaps transactions entered into with an SPE within a securitisation structure be treated?
Answer: They should be treated as securitisation exposures and placed into the waterfall depending on their seniority.
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In measuring the size of the exposure, the swap providing bank needs to incorporate the potential future exposure. If the current value of the swap is non-negative, the exposure size should be measured by the current value plus the add-on as in the current Accord. If the current value is negative, the exposure should be measured by using the potential future exposure part only.
Banks holding positions more senior than these swaps may measure the size of these swaps at their current values (without the potential future exposures) in calculating the enhancement level of their positions (L). If such a bank cannot measure the current value of the swap, it should ignore the existence of the swap.
In deciding whether or not a position is most senior for the purposes of applying the "look-through" approach in paragraphs 522-523, the existence of these swap transactions can be ignored.
18. When the underlying assets of a securitisation transaction are tranches in other securitisations (i.e. resecuritisations), how should a bank calculate KIRB? Does the bank have to go back to the underlying assets of the original securitisation, or can it use the capital requirement for the securitisation exposures which are in the pool of the latest securitisation?
Answer: For QIS3 purposes, the bank should use the capital charge for the securitisation exposures underlying the latest securitisation to calculate KIRB. In other words, it does not have to go back to the underlying assets of the original securitisation. Thus, if there are ratings on the underlying securitisation exposures, the bank should use the RBA to calculate KIRB. Also, in calculating the effective number of exposures (N) both in the RBA and the SFA, the bank should look to the effective number of exposures in the pool of assets underlying the latest securitisation transaction. Under the SFA, the bank should assume an LGD of 50%.
19. In paragraph 528 e, there is a requirement for eligible liquidity facilities that they should contain a term that requires the facility to be reduced/terminated in the event of the average pool quality falling below investment grade. However, this is not a standard term currently. For the purposes of QIS, should we assume that facilities without such a term meet or fail the eligibility test?
Answer: Assume that they fail the test but please annotate your return to indicate that this is the reason.
20. In some securitisations, a reserve account is funded with the receipts from the underlying credit exposures. Usually this reserve account is in the first loss position. Depending on the performance of the underlying credit exposures, the amount that is actually on the reserve account may vary. How should these reserve accounts be treated in the IRB securitisation framework for originators?
Answer: Future receipts from the underlying credit exposures that funds the reserve account are not recognised as credit risk mitigants for the more senior securitisation exposures. In other words, an unfunded reserve account is ignored if it is to be funded from future receipts from the underlying credit exposures.
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If the reserve account is already funded by accumulated cash flows from the underlying credit exposures, it will be treated as follows under the IRB framework. (Any other funded reserve accounts will be treated in the same way.)
First, the KIRB for the securitisation should be measured as the sum of (a) the IRB capital charge against the underlying pool of credit exposures and (b) the IRB capital charge against the assets in which the reserve account is invested.
Next, the reserve account should be positioned in the waterfall of payments depending on its level of subordination (usually a reserve account is the most subordinated position). The SFA and the RBA can then be applied to calculate the risk weights for the reserve accounts and the more senior positions. If the reserve account is recorded as an asset by the originating bank, this asset is to receive an appropriate capital treatment. However if it is not carried as an asset, the originator would not incur a capital charge.
21. What amount should be reported in "Total nominal amounts of underlying facilities in pool" in the "Securitisation - Originators" worksheet? Should this amount include the seller's interest? Similarly, should the item "What was the capital charge pre-securitisation (under the standardised approach)" reflect the capital requirement for the seller's interest?
Answer: The seller's interest in a revolving retail securitisation is not subject to the securitisation framework and should be recorded in the appropriate parts of the standardised and IRB spreadsheets. In other words, the, inputs related to a particular securitisation should not reflect the seller's interest. These inputs should reflect only the investor's interest. As a consequence, the line item "Investors portion of underlying pool" should be reported at 100%. Banks should, however, include the size of the seller's interest as an annotation.
22. What do I have to insert in D169 in the "Securitisation - Originators" worksheet?
Answer: The number of basis points between the spread-trapping trigger and the trigger for commencing early amortisation.
23. In the data worksheet, line 52 requests on-balance sheet information for originated securitisations, does this line represent retained balances and recourse-related items that are currently on the balance sheet, or does it represent the amount of the underlying exposures (which would not be on-balance sheet)?
Answer: Banks should insert all securitisation positions (including recourse items and the like). For originators, all retained/repurchased positions recorded in the originator spreadsheet except trading book positions should be included. For investors, all positions recorded in the investor spreadsheet except trading book positions should be included.
New (20 December 2002)
7 In addition to synthetic securitisations, in some cases, an originator or sponsor bank may have retained or repurchased asset-backed securities issued by one of its "traditional" securitisation structures and subsequently obtained protection from a third party through a guarantee or credit derivative. Such amounts should not be recorded as "retained" in the securitisation worksheet but rather as guaranteed exposures in the portfolio of the protection provider in the manner described below.
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