Securitisations and Significant Risk Transfer

Legacy Supervisory Statements 11/13 and 10/13
Published on 01 April 2013

19 December 2013 - LSS10/13 and LSS11/13 have been superseded by SS9/13.

Supervisory Statement 9/13

Background

From its commencement on 1 April 2013, the Prudential Regulation Authority (PRA) has adopted a number of legacy Financial Services Authority (FSA) policy publications relevant to the advancement of its objectives. These two documents, initially issued by the FSA as Significant risk transfer (SRT) waivers and notifications and Supervisory Formula method and Significant Risk Transfer, have been adopted by the PRA as Supervisory Statements as part of this process. The PRA may choose to review these legacy publications at a later stage.

The significant risk transfer (SRT) waivers and notifications requirements under the Banking Consolidation Directive (BCD) came into force on 31 December 2010. Following this, the FSA published a guide to the options firms can take to demonstrate how they transfer significant credit risk for any given transaction.

PDF Legacy Supervisory Statement 11/13 

Summary of the key issues

In accordance with Part 2 of Annex IX of the BCD, firms have a number of options to transfer significant credit risk for any given transaction, including:

  • Not retaining more than 50% of the mezzanine securitisation positions in a transaction.
  • Where there is no mezzanine position, not holding more than 20% of securitisation positions that are subject to a deduction or 1250% risk weight, where they can demonstrate that the exposure value of those positions exceeds (by a substantial margin) a reasoned estimate of the expected loss on the securitised exposures.
  • The competent authority may allow a firm to make its own assessment if it is satisfied that the firm can meet certain requirements.

Firms seeking to demonstrate SRT by option 1 or option 2 must notify the PRA within one month of the securitisation transaction closing. Firms seeking to demonstrate SRT by option 3 must first apply to the PRA for a waiver. Firms seeking to demonstrate SRT by other options in the BCD are not required to comply with the notification and waiver requirements, but in certain cases may nonetheless need to provide notice of and disclose transactions under Principle for Business 11.

In September 2011, the FSA published material on the Supervisory Formula Method (SFM) and Significant Risk Transfer (SRT). This document sets out our expectations for firms using the SFM to calculate risk-weighted exposure amounts (RWEA) for unrated securitisation positions.

PDF Legacy Supervisory Statement 10/13 

Summary of the key issues

  • The securitisation framework has a strict hierarchy of methods to determine the capital requirements for securitisation positions (set out in BIPRU 9.12 for firms using the Internal Rating Based (IRB) approach). Where a position is rated, the firm must determine the RWEA based on the rating of the position under the Ratings Based Approach (RBA). Where a position is unrated, IRB firms may be able to use the SFM to calculate the RWEA.
  • The rules relating to the SFM, however, must be read against the background of the over-arching requirement for securitisation (see BIPRU 9.3.1R). Originators must transfer a significant amount of credit risk associated with the securitised exposures to third parties to be able to apply the RWEA set out in BIPRU 9. We have significant concerns that firms’ use of the SFM results in a reduction in RWEA that is disproportionate to the credit risk transferred, causing the SRT test to be failed.

 

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