Title III - Requirements for competent authorities in case of application of Article 243 (4) or Article 244 (4) of Regulation (EU) No 575/2013 and in case of application of Article 243(2) or Article 244(2) of Regulation (EU) No 575/2013 where any of the circumstances in accordance with Title II applies

Assessment of the significance of the credit risk transfer

Competent authorities should assess the documentation and evidence provided by the originator institution relating to the securitisation in order to determine whether commensurate credit risk has been transferred to third parties and require additional information, where this is needed to conduct the assessment. Competent authorities should pay particular attention to amongst others, the following factors, as applicable:

• a. the risk-weighted exposure amounts and, as relevant, expected loss amounts calculated for the securitised exposures before securitisation and the corresponding amounts for the tranches transferred and retained by the originator institution after securitisation;
• b. with respect to originator institutions demonstrating SRT in accordance with Articles 243(4) or 244(4) of Regulation (EU) No 575/2013, the methods used to demonstrate that the credit risk which has been transferred is commensurate with the possible reduction in own funds requirements;
• c. where the originator institution has used internal models to demonstrate that significant credit risk has been transferred, whether these models are appropriately robust and where external models have been used whether these models have been integrated into the originator institution’s regular processes, and whether the originator institution has an appropriate understanding of how the model operates and its underlying assumptions;
• d. where the originator institution has used specific stress assumptions on the underlying asset pool, the suitability of such assumptions and how these assumptions and resultant projected losses compare with those used for supervisory stress testing or with other empirical sources of such data, such as the rating agencies.

Competent authorities should consider whether the originator institution has sufficient knowledge of the underlying assets in order to be able to conduct an appropriate credit risk transfer analysis and should also consider whether there is idiosyncratic risk in the portfolio which is not captured by the originator institution’s credit risk assessment or capital calculations. Idiosyncratic risk should be captured through more conservative assumptions than a standard “base case” scenario. This conservatism should seek to capture idiosyncratic risk which may correspond with a “stress case” scenario if applicable.

In the case where the originator institution is relying on the supervisory formula to determine its post-securitisation own funds requirements, competent authorities should consider how sensitive the own funds requirements on the originator institution’s retained securitisation positions are to changes in the underlying IRB parameters. If the capital requirements on the retained securitisation positions are highly sensitive to small changes in these parameters, it is less likely that commensurate credit risk has been transferred.

Assessment of structural features

Competent authorities should assess if there are structural features in a transaction which might undermine the claimed credit risk transfer to third parties, such as features like optional calls or other contractual arrangements which in case of traditional securitisations increase the likelihood that assets will be brought back onto the originator institution’s balance sheet or in case of synthetic securitisations increase the likelihood that the credit protection will be terminated before the transaction’s maturity.

For traditional securitisations, only the following call options granted to originator institutions should not be considered detrimental to achieving effective transfer of credit risk by competent authorities, provided these call options do not grant an originator institution the right to repurchase from the transferee the previously transferred exposure to realise their benefits or oblige the originator institution to re-assume transferred credit risk:

• a. regulatory call options or tax call options that are only exercisable if there are changes of the legal or regulatory framework that have an impact on the content of the contractual relationship of the respective securitisation transaction or that affect the distribution of economic benefits derived from the respective securitisation transaction by any of the parties in the transaction;
• b. clean-up calls meeting the conditions referred to in Article 243(5)(f) of the CRR.

For synthetic transactions, any call options fulfilling the criteria set out in paragraph 5(2)(a) or 5(2)(b) do not need to be considered by competent authorities.

Furthermore, and to avoid any uncertainty, for traditional securitisation, any option granted to securitisation investors, with the exception of options that are only exercisable in the event of contractual breaches by the originator institution, should be considered by competent authorities as preventing an originator from achieving effective transfer of credit risk.

For synthetic securitisations, any option granted to securitisation investors or credit protection providers that is only exercisable in the event of contractual breaches by other parties involved in the transaction should not be considered by competent authorities as preventing an originator institution from achieving effective risk transfer of credit risk, provided the requirements of Article 244(5)(c) of the CRR are fulfilled. All other options granted to securitisation investors or credit protection providers should be assessed by competent authorities, as they may result in additional own funds requirements due to maturity mismatches.

Competent authorities should consider if the originator institution has in the past repurchased transactions to protect investors and if the rules on implicit support as specified in Article 248 of Regulation (EU) No 575/2013 have been followed by the originator institution to ensure that risk has effectively been transferred.

Where transactions include replenishment periods, competent authorities should consider the eligibility criteria of the assets in the underlying pool and give consideration to the minimum and maximum credit quality of eligible assets, and consider if the assets can be substituted into the structure with the view to protecting investors from losses while increasing credit risk to the originator institution to ensure that risk has effectively been transferred.

Competent authorities should consider that transactions do not include any embedded mechanism at origination that is reducing the amount of credit risk transfer by the originator institution to third parties disproportionately over time.

6. Mismatches between credit protection and underlying assets for synthetic securitisations

Competent authorities should consider if there are maturity or currency mismatches between the protection provided and the underlying assets. When considering the maturity of the protection, competent authorities should consider whether optional calls or other features might reduce the maturity of the protection in practice, and how this relates to the expected time of defaults on the asset pool.

Competent authorities should assess maturity mismatches for transactions where asset pools are able to replenish as originator institutions may substitute in longer maturity assets towards the back-end of the protection period, increasing any maturity mismatch.

Competent authorities should assess currency mismatches for transactions where asset pools contain a different currency profile to the liabilities. Where such mismatches occur, prudent haircuts should be applied to the capital relief sought in accordance with the views of the competent authorities. Mitigating instruments, such as currency swaps should be assessed for appropriateness in terms of the balance swapped, the duration of the swap itself, and any contingent triggers. 7. Credit protection issues for synthetic securitisations

Where the securitisation is achieved synthetically using a credit derivative or a guarantee, competent authorities should ensure that the credit protection meets all the relevant requirements set forth in Regulation (EU) No 575/2013 and provides sufficient certainty of payment so as not to undermine the credit risk transfer. If the credit protection is funded, the collateral arrangements should be considered including that they meet all the relevant requirements set forth by Regulation (EU) No 575/2013 for funded credit protection. If the credit protection is unfunded, competent authorities should consider whether suitable arrangements are in place to ensure timely payment.

Competent authorities should consider the credit events that are covered by the credit protection obtained (e.g. whether it includes standard credit events like bankruptcy, failure to pay or restructuring of loans).

If premia paid to credit protection provides are not recognised in the profit and loss account of the originator institution, competent authorities should consider whether premia paid to credit protection providers are excessively high to the extent that SRT will be undermined. This could be assessed in a number of ways such as by looking at the premia paid compared to (i) the yield of the asset pool, or (ii) the losses being covered by the protection, or (iii) fair market rates, or (iv) some combination of these various factors. Competent authorities should also consider whether there are other features of the transaction outside of premia, such as fees, which effectively increase the cost of the protection being provided to the extent that credit risk transfer will be undermined.

Where premia are paid up-front, or not linked to losses in the asset pool being protected or otherwise guaranteed, competent authorities should consider if this reduces the extent of credit risk transfer.

8. SRT to third parties

Competent authorities should assess whether significant credit risk is transferred to third parties who are not connected to the originator institution in a manner that might undermine the credit risk transfer. Competent authorities should consider any relevant connection between the investors or credit protection providers and the originator institution, and whether the originator institution provides the third parties with significant financing when conducting their SRT assessment.

9. Credit ratings

Where an originator institution is using the Ratings Based Method as specified in Article 261 of Regulation (EU) No 575/2013 to calculate the own funds requirements for its exposures to a securitisation, competent authorities should consider whether the chosen credit rating agency has appropriate experience and expertise in the asset class being rated insofar as the competent authorities are aware.

10. Internal policies for assessing transfer of credit risk and SRT

Competent authorities should consider whether the originator institution has appropriate internal policies for making its own assessment of credit risk transfer and SRT. This should include not only an initial assessment of the transaction when the originator institution is first seeking the exclusion of securitised exposures from the calculation of risk-weighted exposure amounts and, as relevant, expected loss amounts, but should also consider the ongoing assessment of SRT during the life of the transaction.