Title IV - Requirements for originator institutions

Originator institutions should provide the competent authority with all requested information of the securitisations on which they intend to demonstrate SRT, so that competent authorities can conduct the assessment of SRT to third parties as specified in Title I to Title III of these Guidelines.

Originator institutions should at least notify the relevant competent authority of any securitisation on which they intend to demonstrate SRT which is not similar in structure and portfolio composition to previous transactions notified by the institution.

12. Governance and policies around SRT assessments

Originator institutions should have a governance process in place for evaluating transactions claiming SRT. This process should include details of relevant committees, any internal approval procedure, and evidence of appropriate stakeholder involvement and a suitable, auditable trail of documentation.

Originator institutions should have appropriate systems and controls regarding SRT through securitisation, including for the ongoing monitoring of SRT requirements, at least on a quarterly basis, throughout the maturity of relevant transactions.

Originator institutions should have policies and methodologies in place that ensure ongoing compliance with all SRT requirements according to Articles 243 and 244 of Regulation (EU) No 575/2013. Part. 2 - Specific requirements for originator institutions in order to comply with Article 243(4) or 244(4) of Regulation (EU) No 575/2013

13. Risk-management and self-assessment

Originator institutions should have policies and methodologies in place that ensure the possible reduction of own funds requirements achieved by originator institutions through securitisation is justified by a commensurate credit risk transfer to third parties.

Originator institutions’ SRT policies should be part of their broader capital allocation strategies. In particular, the originator institutions’ policies on transfer of credit risk and SRT to third parties should specify how transactions claiming SRT align with originator institutions’ overall risk management strategies and internal capital allocation.

Originator institutions should make an assessment of the risks involved on any potential transaction claiming SRT, including an assessment of the risk of the underlying assets, an assessment of the securitisation structure itself considering the credit risk of the tranches and other relevant factors that affect the substance of credit risk transfer.

When conducting their SRT assessment, originator institutions should also consider whether the possible reduction of own funds requirements is in line with the economic credit risk transfer achieved, for example by comparing the effects of the securitisation on originator institutions’ economic capital and on originator institutions’ own funds requirements.

Originator institutions should analyse whether they can prudently afford the premia payable under the relevant transactions given their earnings, capital, and overall financial condition.

14. Other requirements

Originator institutions should use appropriate methods and procedures to assess and demonstrate SRT.

Originator institutions should assess the expected loss (EL) and the unexpected loss (UL) of the securitised assets throughout the maturity of the transaction when conducting an SRT assessment.

Originator institutions should consider the transaction structure and structural features of the securitisation, for example, if the transaction is cash or synthetic, any hedging techniques or maturity mismatches, if any.

In order to identify such factors that may undermine the transfer of credit risk and SRT to third parties, originator institutions should evaluate the degree of credit risk mitigation or credit risk transfer of a transaction considering, amongst others, factors such as the following, to the extent applicable:

• a. A comparison of the present value of premia and other costs not yet recognised in own funds relative to losses of the protected exposures over a variety of stress scenarios;
• b. The pricing of the transaction relative to market prices, including appropriate consideration of premium payments;
• c. The timing of payments under the transaction, including potential timing differences between the originator institutions’ provisioning for or write downs of the protected exposures and payments by the protection seller;
• d. A review of applicable call dates to assess the likely duration of the credit protection obtained relative to the potential timing of future losses on the protected exposures;
• e. An assessment of counterparty credit risk, in particular an analysis of whether certain circumstances could lead to the originator institutions’ increased reliance on the counterparty providing credit protection at the same time that the counterparty's ability to meet its obligations is weakened;
• f. The nature of the link between the different entities involved in the transaction (originator, arranger, investors, protection seller etc);
• g. The existence of implicit forms of credit enhancement;
• h. The thickness of the mezzanine and junior tranches relative to the credit risk profile of the underlying exposures; and
• i. An assessment of the credit risk of the underlying assets: this could be achieved through stresses applied to the underlying assets, an assessment of the payment profile of the exposure to the underlying assets’ credit risk, evaluation of key credit risk factors (i.e. LGD, PD, EAD, etc.).