DP3/23 – Securitisation: capital requirements

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Responses are requested by Wednesday 31 January 2024.

The PRA prefers responses to be sent via email to: DP3_23@bankofengland.co.uk.

Alternatively, please address any comments or enquiries to:
Securitisation Policy team
Prudential Regulation Authority
20 Moorgate
London
EC2R 6DA

Executive summary

The Capital Requirements Regulation (CRR)^{footnote [1]} sets out capital requirements for securitisation exposures. The Prudential Regulation Authority (PRA) intends to consult on draft PRA rules to replace firm-facing requirements in Part Three, Title II, Chapter 5 (the ‘Securitisation Chapter’) of the CRR in 2024 H2, subject to HM Treasury (HMT) making the necessary legislation. This discussion paper (DP) is intended to prepare for that consultation by raising certain key issues for feedback from firms and collecting data in order to inform the PRA’s approach.

When transferring firm-facing requirements in the Securitisation Chapter of the CRR into PRA rules, the PRA will consider its objectives and ‘have regards’ as detailed in the Financial Services and Markets Act 2000 (FSMA) as amended by FSMA 2023. The relevant standards of the Basel Committee on Banking Supervision (BCBS) will be an important reference point in considering the PRA’s primary objective of safety and soundness of firms. The BCBS revisions to the securitisation framework following the 2007-08 global financial crisis aimed to address a number of shortcomings in the Basel II securitisation framework and to strengthen the capital standards for securitisation exposures. They also included criteria for simple, transparent and comparable (STC) securitisations that qualify for preferential prudential treatment. In general, the PRA considers that broad alignment with these Basel standards would advance the PRA’s primary objective of promoting the safety and soundness of PRA-authorised firms by addressing prudential risks associated with securitisation exposures.

In consultation paper (CP)16/22 – Implementation of the Basel 3.1 standards, the PRA proposed to implement the Basel 3.1 output floor. The PRA has been engaging with industry feedback over the implications of the proposals relating to the output floor for firms with certain securitisation exposures. The PRA is considering a range of policy options while monitoring the impact of the proposals on the output floor. One option would be to go ahead with implementation of the Basel 3.1 output floor without any adjustment to the Pillar 1 framework for determining capital requirements for securitisation exposures. Another option would be a targeted and evidence-based adjustment to the Pillar 1 securitisation capital framework. This DP seeks further evidence from respondents to support the development of an appropriate policy response that advances the PRA’s objectives in light of feedback from industry.

The PRA would, in any event, support a wider review by the BCBS of Basel standards relating to the Pillar 1 securitisation capital requirements. These have not been implemented uniformly across jurisdictions,^{footnote [2]} and their interaction with the Basel 3.1 output floor raises questions about their design and calibration.

Another topic addressed in this DP is the hierarchy of methods for determining securitisation capital requirements. This DP draws attention to a divergence of the current hierarchy of methods in the Securitisation Chapter of the CRR from the Basel standards. This DP explores the possibility of better aligning the hierarchy in the Securitisation Chapter of the CRR with the Basel standards and seeks views and evidence from respondents on the possible impacts.

This DP also discusses the scope of the UK framework for simple, transparent and standardised (STS) securitisations.^{footnote [3]} The UK framework is currently aligned with the Basel standards in that it covers traditional (funding) securitisations meeting the eligibility criteria, but not synthetic securitisations. In this DP, the PRA sets out policy considerations that would on balance support maintaining this approach, and gives respondents an opportunity to comment and provide feedback.

1: Introduction

1.1 This DP considers a set of issues relating to capital requirements for PRA-authorised CRR firms' securitisation exposures. These relate to:

• the calibration of the Pillar 1 framework for determining capital requirements for securitisation exposures and their interaction with the Basel 3.1 output floor;
• the hierarchy of methods for determining capital requirements for securitisation exposures; and
• the specification of securitisations that qualify as STS and associated preferential prudential treatment.

1.2 This DP seeks views and evidence from market participants on possible approaches to these issues. These will inform the PRA’s further work on a CP on draft PRA rules to replace relevant firm-facing requirements in the Securitisation Chapter of the CRR, currently planned for 2024 H2, subject to HMT taking steps to bring into effect the repeal of the Securitisation Chapter of the CRR.

1.3 This DP is relevant to PRA-authorised CRR firms that manufacture or invest in securitisations. It is also relevant to qualifying parent undertakings, which for this purpose comprise financial holding companies and mixed financial holding companies, as well as credit institutions, investment firms, and financial institutions that are subsidiaries of these firms. This DP may also be of interest to other firms that are involved in securitisation markets, for example firms providing credit risk mitigation or External Credit Assessment Institutions (ECAIs).

Background

1.4 Chapter 11 of HMT’s 2021 – Review of the Securitisation Regulation: Report and call for evidence response (the Securitisation Regulation Review) discussed industry feedback on the prudential requirements for securitisation even though this was not the primary focus of the review. HMT recognised this was a priority area for respondents.

1.5 CP16/22 consulted on draft PRA rules to implement the Basel 3.1 standards, including the output floor.

1.6 FSMA 2023 provides for the repeal of retained European Union (EU) law relating to financial services. Most firm-facing requirements in the CRR, including the Securitisation Chapter, are expected to be replaced with PRA rules. This means that the PRA will take responsibility for setting and further developing most firm-facing requirements in the Securitisation Chapter of the CRR. This is subject to HMT taking steps to bring into effect the repeal of the relevant provisions of CRR with a view to their replacement with PRA rules.

Discussion paper structure

1.7 Chapter 2 discusses the industry feedback in relation to the potential impact of the Basel 3.1 output floor on firms with certain securitisation exposures, particularly retained senior tranches of synthetic significant risk transfer (SRT) securitisations. The PRA is considering a range of policy options, within its statutory and prudential constraints, and seeks evidence from respondents in assessing the scope for a targeted adjustment to the Pillar 1 securitisation capital framework.

1.8 Chapter 3 compares the hierarchy of methods for calculating capital requirements for securitisation exposures under the CRR with the hierarchy of methods in the Basel standards. The PRA seeks views on whether to change the CRR hierarchy to better align with the Basel hierarchy and evidence on the potential impacts of such a change.

1.9 Chapter 4 describes the UK STS framework. Consistent with the Basel standards, the UK STS framework is limited to qualifying traditional securitisations and does not extend to synthetic securitisations. The PRA sets out policy considerations that would on balance support maintaining this approach and seeks feedback from respondents.

1.10 Chapter 5 seeks feedback on the use of credit risk mitigation in synthetic SRT securitisations.

Responses and next steps

1.11 This DP closes on Wednesday 31 January 2024. The PRA invites views and evidence on the topics discussed in this DP. Please address any comments or enquiries to DP3_23@bankofengland.co.uk.

1.12 The PRA may share responses to this DP with the FCA or HMT. This means HMT and/or the FCA may review the responses and may also contact you to clarify aspects of your response.

1.13 In addition to inviting firms to respond to this DP, the PRA may also engage with market participants to gather additional data to support policy development.

2: The Basel 3.1 output floor and capital requirements for securitisation exposures

2.1 This chapter summarises the PRA’s proposals in CP16/22 in relation to the output floor and explores how the output floor interacts with features of the Pillar 1 securitisation capital framework. The PRA is monitoring the expected impact on firms with securitisation exposures, particularly retained senior tranches of synthetic SRT securitisations. The PRA is also considering to what extent this impact may raise questions regarding the calibration of the Pillar 1 framework for determining capital requirements for securitisation exposures.

2.2 This chapter also explores possible options for responding to industry feedback regarding this impact in advancing the PRA’s objectives. It identifies areas where the PRA would benefit from additional data to further assess and, where relevant, calibrate the options. CP 16/22 referred to the possibility of a further consultation during the output floor transition period. The PRA is engaging with market participants early with a view to gathering evidence ahead of that further consultation on the interaction of the output floor and the Pillar 1 framework, which will be part of the PRA’s proposed consultation on the transfer of firm-facing requirements in the Securitisation Chapter (currently planned for 2024 H2).

The output floor and securitisation exposures

CP16/22 output floor proposals

2.3 CP16/22 proposed to implement the output floor. In summary, the output floor aims to ensure that the total risk-weighted assets (RWAs) of firms using internal models do not fall below 72.5% of the total RWA calculated under the standardised approaches (SA).

2.4 A firm within the scope of the output floor would be required to calculate total RWAs, for the purposes of compliance with Pillar 1 capital requirements and buffers, as the higher of: (i) total RWAs calculated using all approaches for which it has supervisory approval to use (including internal models); or (ii) 72.5% of total RWAs calculated using only the SA, and the following calculation:

2.5 CP16/22 proposed to apply the output floor to firms in scope of the PRA’s CRR requirements in the following way:

• on a consolidated basis only, at the UK consolidation level (ie the ultimate UK group level) of UK-headquartered groups;
• on an individual basis to UK stand-alone firms; and
• on a sub-consolidated basis for ring-fenced sub-groups, or individual basis where the ring-fenced body is not part of a ring-fenced sub-group.

2.6 CP16/22 proposed transitional arrangements that would align with the Basel 3.1 standards regarding the length of the proposed implementation period for the output floor. CP16/22 envisaged that the transition period would commence on 1 January 2025 with the multiplier being 50%. The multiplier would increase each year by 5% until the end state of 72.5% is achieved on 1 January 2030. However, the PRA subsequently published an update on timings of Basel 3.1 implementation in the UK stating that it intended to move back the implementation date of the final Basel 3.1 policies by six months to 1 July 2025. This would reduce the transitional period to 4.5 years to ensure full implementation by 1 January 2030 in line with the proposals set out in CP16/22.

2.7 Securitisation exposures, like all exposures, would be included in the output floor calculations, in line with Basel 3.1 standards. For purposes of the output floor calculations, the standardised approaches include the securitisation standardised approach (SEC-SA), the securitisation external ratings-based approach (SEC-ERBA) or a risk-weight of 1250% in accordance with the hierarchy of methods in the CRR (see Chapter 4 of this DP). The standardised approaches do not include the securitisation internal ratings-based approach (SEC-IRBA) or the securitisation internal assessment approach (SEC-IAA). CP16/22 clarified that, as the output floor applies as an aggregate measure, the output floor would not directly affect securitisation exposure-level RWAs or securitisation transaction-level supervisory assessments.

2.8 Please refer to Chapter 9 of CP16/22 for further details on the PRA’s proposals in relation to the implementation of the output floor.

Monitoring of the impact of the output floor on securitisation exposures

2.9 The PRA is monitoring and assessing the expected impacts of the output floor on RWAs, including through Quantitative Impact Study (QIS) data. The QIS data may evolve over time as firms gain a clearer understanding of the Basel 3.1 output floor and the mitigating actions available to them. The PRA also notes that the QIS data does not reflect the specific proposals in CP16/22, some of which may reduce the likelihood that firms are bound by the output floor,^{footnote [4]} or any potential future changes to the PRA’s proposals as a result of the consultation process.

2.10 The PRA recognises that, to the extent that a firm is bound by the output floor at an aggregate level, the difference between RWAs for particular exposures under the internal model approaches and the SA will drive up overall post-output floor RWAs. The PRA is also aware from its engagement with industry in the wake of CP16/22 that in relation to securitisation exposures there is particular concern about the implications for retained senior tranches of synthetic SRT securitisations.

2.11 The data available to the PRA indicates that in recent years, six UK banks have originated SRT securitisations. The PRA understands that these originators of SRT securitisations often buy ‘first loss’ credit protection on a portfolio of assets from investors and generally retain the credit risk on the senior unprotected tranches. They also generally risk-weight the retained tranches under the SEC-IRBA. Banks could see a material increase in RWAs on these retained tranches when the output floor is applied, although the output floor is an aggregate measure.

Potential mitigating actions by firms

2.12 The PRA is aware that some UK SRT originators are already considering actions to mitigate the impact of the output floor on these retained tranches. The PRA has limited information on the extent to which they may be able to mitigate the potential impact of the output floor, and what the costs of such mitigants available to firms would be.

2.13 As further discussed in Chapter 3, the hierarchy of methods for determining securitisation capital requirements allows or requires firms in certain circumstances to use the SEC-ERBA instead of the SEC-SA for rated positions or positions in respect of which an inferred rating may be used. As discussed in paragraph 2.7, this will also be relevant for purposes of the output floor calculation. Firms could consider whether it would be possible to mitigate the potential impact of the output floor by obtaining (and maintaining) a rating from an ECAI for securitisation exposures for which it is not already available. However, this would not be an option in relation to exposures to third party securitisations. It would also come at a cost to firms and would only be a partial mitigant.

2.14 Originators of SRT securitisations might be able to structure them by purchasing additional credit protection, for example, on mezzanine tranches. This would reduce their Pillar 1 capital requirements and also reduce the difference between the RWAs for retained tranches calculated under the SEC-IRBA and the SEC-SA or the SEC-ERBA, or even eliminate the difference altogether where the risk weight falls to the floor of 15% in the SEC-IRBA and SEC-SA. Originators would need to consider the trade-off between this capital reduction and the cost of purchasing additional credit risk mitigation. The scope for this mitigation option would also be constrained by investor appetite. Therefore, this approach could also only be a partial mitigant.

Q1: To what extent do firms expect to be able to mitigate the potential impact of the output floor on securitisation exposures, including retained tranches of SRT securitisations? Please provide estimates of costs and benefits and / or illustrative examples.

Capital ‘non-neutrality’ in the securitisation capital framework

2.15 Questions about the impact of the output floor on firms with retained tranches of SRT securitisations are linked to the design and calibration of the Pillar 1 methods for determining capital requirements for securitisation exposures. The PRA is aware of the wider industry view that the level of capital ‘non-neutrality’ in these Pillar 1 methods, in particular the SEC-SA, is high. The level of ‘non-neutrality’ is a key determinant of capital requirements for securitisation positions in both the SEC-SA and the SEC-IRBA. The level of ‘non-neutrality’ in the SEC-SA relative to that in the SEC-IRBA could affect the impact of the output floor on firms with securitisation exposures.

2.16 Capital ‘non-neutrality’ refers to the capital surcharge from holding all tranches of a securitisation relative to holding the underlying pool assets. ‘Non-neutrality’ is the result of several factors in the Pillar 1 methods for determining capital requirements for securitisation exposures. A key parameter contributing to ‘non-neutrality’ in the SEC-SA and the SEC-IRBA is the p-factor.^{footnote [5]} CRR provisions implementing the Basel standards use a formula for calculating the p-factor in the SEC-IRBA, which has a floor of 0.3 (ie a minimum capital surcharge of 30%) for both non-STS and STS securitisation exposures. In the SEC-SA, CRR provisions implementing Basel standards set a p-factor of 0.5 for exposures to STS securitisations and a p-factor of 1 for exposures to non-STS securitisations (and a p-factor of 1.5 for exposures to resecuritisations).

2.17 The PRA considers that a degree of ‘non-neutrality’ is justified in economic terms. Securitisation is a complex process involving multiple participants. These participants are likely to have conflicting interests and varying access to information. The PRA considers that the additional risks arising from the securitisation process could provide a rationale for some level of ‘non-neutrality’. What is less clear is what this level should be, whether it should vary between different types of securitisation exposures and how it might have evolved over time. The latter may be affected by regulatory requirements (eg in relation to due diligence by investors and transparency, risk retention and credit granting by manufacturers of securitisations) and market developments (eg the underlying exposures and structural features of the securitisations issued).

2.18 The PRA is also aware that the p-factor was not set solely with these economic considerations relating to ‘non-neutrality’ in mind. Apart from capturing ‘non-neutrality’, the p-factor also performs two other important functions in both the SEC-SA and SEC-IRBA calculations. Firstly, the p-factor affects the allocation of capital across different tranches of a securitisation.^{footnote [6]} Secondly, the p-factor acts as a smoothing parameter reducing sudden increases in securitisation capital requirements in response to small changes in the credit risk capital charge for the underlying pool (known as cliff effects). Questions may be raised over whether a single parameter can optimally achieve all these different objectives.

2.19 The PRA would support an evaluation of the securitisation capital framework, particularly its level of ‘non-neutrality’, by the BCBS. The PRA expects that this would be a complex exercise requiring a significant amount of data and analysis. It is difficult to predict the outcome of such an exercise as it would be relevant to the design and calibration of all methods for determining capital requirements for securitisation exposures.

Policy options

2.20 The PRA is considering two policy options:

• option 1: implementation of the output floor as proposed in CP16/22, without any adjustments to the Pillar 1 framework for determining capital requirements for securitisation exposures; or
• option 2: implementation of the output floor with a targeted and data-based adjustment to the Pillar 1 framework for determining capital requirements for securitisation exposures.

The PRA discusses both options below, setting out policy considerations that would be relevant to its further assessment of these options.

2.21 The PRA has also considered:

• option 3: carve-outs from, or other qualifications to, the output floor for some or all securitisation exposures.

This option would however depart from the proposals in CP16/22 regarding the implementation of the output floor and as set out below this raises prudential concerns.

Option 1 – implementation of the output floor without any adjustments to the Pillar 1 framework for determining capital requirements for securitisation exposures

Overview

2.22 Option 1 is to implement the output floor as proposed in CP16/22 while maintaining the current Pillar 1 framework for determining capital requirements for securitisation exposures.

2.23 The PRA is monitoring the expected impact of this option on firms with securitisation exposures, particularly on the originators of SRT securitisations.

Policy considerations

2.24 The PRA considers that, in general, the implementation of the output floor as proposed in CP16/22 would support the PRA’s primary objective of promoting the safety and soundness of PRA-authorised firms, by providing a robust, clear, and effective backstop to modelled risk weights. Option 1 would be consistent with the proposal in CP16/22 to implement the output floor on all exposures and to include securitisation exposures in the output floor calculation.

2.25 However, the PRA is aware that firms bound by the output floor may be less able to use SRT securitisations as an efficient credit risk and regulatory capital management tool, constraining their options both in a business-as-usual context and in stressed conditions. This at least raises a question whether option 1 would, on the whole, advance the safety and soundness of PRA-authorised originators of SRT securitisations.

2.26 The PRA is also considering whether option 1 might facilitate effective competition in the markets for services provided by PRA-authorised firms in carrying on regulated activities, one of its secondary objectives. Option 1 could adversely affect major UK banks that originate SRT securitisations and risk-weight retained exposure using the SEC-IRBA. The PRA considers that smaller firms are less likely to use the SEC-IRBA and thus, in theory, could see some competitive advantage. However, these firms do not typically originate SRT securitisations.

2.27 The PRA also has a secondary objective to act, so far as reasonably possible, in a way that facilitates, subject to aligning with relevant international standards: (a) the international competitiveness of the economy of the UK (including, in particular, the financial services sector through the contribution of PRA-authorised firms); and (b) its growth in the medium to long term. Option 1 is aligned with Basel standards, and the PRA’s secondary competitiveness and growth objective subject to alignment with international standards. However, the link between Option 1 and competitiveness and growth would depend on its impact on UK firms with certain securitisation exposures, particularly originators of SRT securitisation. The PRA also notes that the Basel standards have not been implemented uniformly across jurisdictions, which is relevant to international competitiveness.

2.28 Further, the PRA would need to consider whether the regulatory capital impact of option 1 on some firms with securitisation exposures, particularly originators of SRT securitisations, is proportionate to the prudential benefits. This is one of the regulatory principles which the PRA must have regard to and may be significant to the PRA’s assessment of option 1.

Option 2 – implementation of the output floor with a targeted data-based adjustment to the Pillar 1 framework for determining capital requirements for securitisation exposures

Overview

2.29 The starting point for option 2 would be the proposal in CP16/22 to implement the output floor on all exposures and to include securitisation exposures in the output floor calculation. Option 2 would combine this with an adjustment to, but not a fundamental review of, the Pillar 1 framework for determining capital requirements for securitisation exposures. While the adjustment would be to the Pillar 1 framework, this would also apply to the output floor calculations through the use of the SEC-SA approach.

2.30 In particular, the PRA is considering a reduction in the p-factor in the Pillar 1 SEC-SA in order to bring the level of ‘non-neutrality’ closer to that of SEC-IRBA (as discussed in the section on ‘Capital non-neutrality in the securitisation capital framework’ above in paragraphs 2.15 to 2.19). This would reduce the gap between the SEC-IRBA and the SEC-SA and hence the impact of the output floor on firms where it is binding.

2.31 For the reasons set out in the sub-section on ‘Policy considerations’ below, the PRA considers that option 2 could be a credible alternative to option 1, provided that option 2 is calibrated to advance the safety and soundness of PRA-authorised firms. In the sub-section on ‘Constraints on developing option 2’ below, the PRA therefore seeks input on how option 2 may be developed bearing in mind the PRA’s statutory and prudential constraints.

Policy considerations

2.32 Depending on its design and calibration, option 2 could advance the safety and soundness of PRA-authorised firms. Option 2 is consistent with including securitisation exposures in the calculation of the output floor. It could also mitigate the impact of the output floor on firms with securitisation exposures, particularly retained senior tranches of SRT securitisations. Relative to option 1, it could therefore facilitate the use of SRT securitisations as an efficient credit risk and regulatory capital management tool. However, option 2 would have to be designed so that SEC-SA capital requirements remain risk-sensitive and meet other constraints discussed in the section on ‘Constraints on developing option 2’ below.

2.33 Regarding the implications for competition, option 2 would reduce capital requirements for all securitisation exposures that are risk-weighted using the SEC-SA. This would assist both smaller firms that use the SEC-SA to determine their Pillar 1 capital requirements and larger firms that use the SEC-SA for purposes of the output floor calculation.

2.34 Option 2, if appropriately designed to meet statutory and prudential constraints, could facilitate competitiveness and growth. For firms with securitisation exposures and bound by the output floor, option 2 would mitigate the effect of the output floor to some extent, albeit not as much as some variants of option 3, as discussed below. It would also reduce capital requirements calculated by firms under Pillar 1 using the SEC-SA. However, the PRA’s secondary competitiveness and growth objective is subject to alignment with international standards. Option 2 would not be fully aligned with Basel standards, and this would make it more difficult to argue that it advances the PRA’s secondary competitiveness and growth objective if the calibration of the option were too weak. The PRA will continue to monitor the approaches taken in other jurisdictions.

Constraints on developing option 2

2.35 The PRA would need to consider carefully to what extent any adjustment to the Basel standards might be justified in light of its objectives, the FSMA regulatory principles and other matters to which it needs to have regard, as discussed above.

2.36 Reducing the p-factor in the SEC-SA would also be subject to the following constraints:

(a) preserving risk sensitivity: the PRA considers that the SEC-IRBA, with its additional parameters, is generally more risk-sensitive than the SEC-SA. Therefore, the p-factor (and overall ‘non-neutrality’) in the SEC-SA should not generally fall below the p-factor (and overall ‘non-neutrality’) in the SEC-IRBA on a transactional basis. The precise formulation of this constraint (eg the appropriate gap between the p-factor in the SEC-SA and the p-factor in the SEC-IRBA, and whether the constraint may be breached in a small percentage of cases) would require further analysis.

(b) incentives for STS securitisations: the PRA would be reluctant to reduce the p-factor in the SEC-SA for non-STS securitisations all the way to the p-factor for STS securitisations. This is to allow for some incentives for STS securitisations. Please also refer to our discussion of the STS framework in Chapter 4.

(c) cliff effects: as mentioned in the section on ‘Capital non-neutrality in the securitisation capital framework’ above in paragraphs 2.15 to 2.19, the p-factor in the SEC-SA also serves to mitigate cliff effects. The PRA would not want to unduly exacerbate cliff effects by reducing the p-factor.

Please also refer to the section on ‘Policy considerations’ for other considerations relevant to the PRA’s assessment of option 2.

2.37 The constraints outlined in paragraph 2.36 would limit the extent to which the PRA could reduce the p-factor in the SEC-SA below the current level of 1 and still meet its safety and soundness objective.

2.38 The PRA has undertaken an initial comparison of p-factors (and overall ‘non-neutrality’) in the SEC-IRBA and the SEC-SA using two datasets: one based on data on UK SRT securitisations notified to the PRA; and another on common reporting (COREP) regulatory data on securitisations reported to the PRA. Both datasets have limitations. For example, they do not include, in relation to all the securitisation transactions covered, all parameters required to calculate the p-factor under SEC-IRBA, which requires observations to be dropped or assumptions to be made. Also, the SRT notifications can be used to estimate the day 1 (ie as at issuance date) position only.

2.39 The PRA limited its analysis to transactions for which the SEC-IRBA was used (as well as some transactions for which the inputs necessary for the SEC-IRBA were reported even though the SEC-IRBA may not have been used). The PRA then calculated the p-factor (and overall level of ‘non-neutrality’) if counterfactually they were risk weighted under SEC-SA. This is in order to compare the p-factors (and ‘non-neutrality’) in the SEC-IRBA and the SEC-SA for these transactions.

2.40 This initial (and, due to data limitations, partial) analysis provided an indication that the p-factor in the SEC-SA is calibrated conservatively relatively to the p-factor in the SEC-IRBA for many securitisations of non-retail exposures, suggesting some scope for reducing the p-factor in the SEC-SA. In particular, the PRA notes that:

• for most but not all securitisations of non-retail exposures in the datasets, there is scope for reducing the p-factor in the SEC-SA to 0.7 without this p-factor (and overall ‘non-neutrality’) falling below the p-factor (and overall ‘non-neutrality’) calculated under SEC-IRBA. Typically, cases where the p-factor under SEC-IRBA is higher than 0.7 are cases where N, the effective number of exposures in the pool of underlying exposures calculated under Article 259 of the CRR, is low.
• for securitisations of retail exposures, the significantly limited data available suggests that levels of the p-factor and ‘non-neutrality’ in the SEC-IRBA are generally higher than for securitisations of non-retail assets. This tends to be driven by high values for the maturity of the tranche as determined in accordance with Article 257 of the CRR. This would make it more difficult to justify such a reduction in the SEC-SA p-factor for these securitisations.

2.41 The PRA is considering whether a reduction in the p-factor in the SEC-SA could be achieved without lowering it to a single value. One possibility might be to have a compact table with different values for the p-factors for securitisations with different features. This could help to maintain risk sensitivity. Firms would need to be able to easily use this table with the data available to them.

2.42 Taking this idea a little further, another possibility might be to permit (but not require) firms to use a simple formula-based approach to calculating the p-factor in the SEC-SA. This approach would be informed by some of the features of the formula for determining the p-factor in the SEC-IRBA but would need to be simpler.

2.43 The PRA is still assessing what form any reduction in the p-factor in the SEC-SA might take, whether any such reduction would meet the constraints set out in paragraph 2.36 above and to what extent it would address industry feedback about the interaction between the output floor and Pillar 1 capital requirements for securitisation exposures. The PRA would welcome data and analysis from respondents that could support this work.

Q2: How do you consider that option 2 could be developed?

Q3: To what extent could the p-factor be reduced while meeting the constraints set out in paragraph 2.36? Please provide evidence that would support this assessment. Are there other constraints that the PRA should consider?

Q4: To what extent could option 2 address industry feedback about the interaction between the output floor and Pillar 1 capital requirements?

Option 3 – carve-outs from, or other qualifications to, the output floor for some or all securitisation exposures

Overview

2.44 In theory, some or all securitisation positions could be carved out from the output floor, or the output floor methodology could be adjusted in relation to some or all securitisation positions.

2.45 In the EU, a variant of option 3 was an amendment to the proposed amendments to the EU CRR (‘the EU CRR3 package’) that the ECON Committee of the European Parliament voted for on 9 February 2023. This allowed firms to apply lower p-factors of 0.25 and 0.5 for STS and non-STS securitisations respectively when calculating securitisation RWAs under the SEC-SA for the purposes of the output floor. However, when calculating Pillar 1 RWAs under the SEC-SA, these reduced p-factors would not apply. The amendment was to apply on a transitional basis until the completion of a comprehensive review of the EU securitisation capital framework as part of the Capital Market Union Action Plan. Since then, the EU Commission, Parliament and Council reached a provisional agreement on the EU CRR3 package on 27 June 2023, though it remains to be seen how the details of the earlier ECON amendment will be reflected in the final EU CRR3 package.

2.46 The PRA is not minded to pursue option 3. In summary, this is because concern over the impact of the output floor on firms with certain securitisation exposures may point to issues with the calibration of the Pillar 1 securitisation capital framework. The PRA considers that it would be better to consider whether to address any such issues by means of a targeted adjustment to the SEC-SA than to modify the output floor methodology.

Policy considerations

2.47 The PRA does not consider that option 3 would be best for promoting the safety and soundness of PRA-authorised CRR firms. While option 3 would mitigate the impact of the output floor for firms with securitisation exposures, particularly retained senior tranches of SRT securitisations, it would at least to some extent undermine the output floor and the backstop to modelled risk weights that the output floor is intended to provide. In CP16/22, the PRA did not propose any carve-outs (or qualifications to) the output floor in relation to particular exposures.

2.48 The PRA also does not consider that option 3, with the selective benefits it bestows on relatively large firms using the SEC-IRBA, would facilitate competition.

2.49 Depending on its specification, option 3 could put UK firms using SEC-IRBA, including originators of SRT securitisations, in a comparable position to EU firms using SEC-IRBA. However, as option 3 involves a significant departure from the Basel standards, it would not support the PRA’s competitiveness and growth objective, which is subject to alignment with international standards.

Q5: What are your views of the different policy options in relation to the interaction between the output floor and Pillar 1 framework for determining capital requirements for securitisation exposures?

3: The hierarchy of methods for determining capital requirements for securitisation exposures

3.1 This chapter compares the hierarchy of methods for determining capital requirements for securitisation (the securitisation hierarchy of methods) in the CRR with the securitisation hierarchy in the Basel standards. The PRA is considering whether to change the securitisation hierarchy of methods in the CRR to better align it with Basel standards. The PRA would welcome feedback and any supporting evidence on potential impacts of changing the hierarchy, whether positive or negative.

Divergence of the UK securitisation hierarchy of methods from the Basel securitisation hierarchy of methods

The Basel securitisation hierarchy of methods

3.2 The Basel framework sets out the following securitisation hierarchy of methods:

• a bank must use the SEC-IRBA for a securitisation exposure (except a resecuritisation exposure) of an internal ratings-based (IRB) pool, unless otherwise determined by the supervisor.
• if a bank cannot use the SEC-IRBA, it must use the SEC-ERBA for a securitisation exposure to a standardised pool provided that (1) the bank is located in a jurisdiction that permits use of the SEC-ERBA and (2) the exposure has an external credit assessment that meets certain operational requirements, or there is an inferred rating that meets certain operational requirements. In certain circumstances, a bank that is located in a jurisdiction that permits the use of the SEC-ERBA may use the SEC-IAA for an unrated securitisation exposure to an SA pool within an asset-based commercial paper (ABCP) programme.
• a bank that cannot use the SEC-ERBA or the SEC-IAA for its exposure to an SA pool may use the SEC-SA. The SEC-SA must be used, with certain adjustments, for resecuritisation exposures.
• in general, securitisation exposures to which none of the above approaches can be applied must be assigned a 1250% risk weight.^{footnote [7]}

The CRR securitisation hierarchy of methods

3.3 Article 254 of the EU CRR deviated from the Basel securitisation hierarchy of methods by generally placing the SEC-SA above the SEC-ERBA.

3.4 However, the CRR securitisation hierarchy of methods is subject to certain triggers for switching back to the Basel hierarchy that apply on a case-by-case basis. In particular, for rated positions or positions in respect of which an inferred rating may be used, the SEC-ERBA must be used instead of the SEC-SA in each of the following cases:

• where the application of the SEC-SA would result in a risk weight higher than 25% for positions qualifying as positions in an STS securitisation;
• where the application of the SEC-SA would result in a risk weight higher than 25% or the application of the SEC-ERBA would result in a risk weight higher than 75% for positions not qualifying as positions in an STS securitisation; and
• for securitisation transactions backed by pools of auto loans, auto leases and equipment leases.

3.5 Also, a firm may notify its competent authority once a year of a decision to apply the SEC-ERBA instead of the SEC-SA to all rated securitisation positions or positions in respect of which an inferred rating may be used. In the absence of an objection of the competent authority, this decision will remain valid until a subsequently notified decision comes into effect, and the firm must act accordingly.

3.6 Competent authorities also have discretions, on a case-by-case basis, to prohibit firms from applying SEC-SA, when the risk-weighted exposure amount resulting from the application of the SEC-SA is not commensurate with the risks posed to the institution or to financial stability and to prohibit the use of SEC-IRBA where securitisations have highly complex or risky features.

3.7 The result was a much more complex CRR securitisation hierarchy, which could result in incorrect risk-weighting and which is likely to be considered a material deviation from Basel standards. The PRA understands that this deviation may have reflected at least in part a preference in the EU for not requiring the use of SEC-ERBA in relation to lower risk securitisation exposures for which sovereign ceilings in ECAI rating methodologies might otherwise have materially increased risk weight outcomes.^{footnote [8]}

3.8 The chart below illustrates how the securitisation hierarchy of methods in the CRR, which became retained EU law following the UK’s withdrawal from the EU, deviates from the Basel hierarchy.

PRA views

3.9 The PRA considers that, in principle, changing the securitisation hierarchy of methods in the UK to better align with Basel standards could result in more risk-sensitive capital requirements for some securitisation exposures. However, the PRA would like to understand the potential impacts of such a change, whether positive or negative.

Policy considerations

3.10 The PRA is aware of risks relating to the use of external ratings. These were highlighted during the global financial crisis, including in relation to external ratings of securitisation exposures. The BCBS (2014) Revisions to the securitisation framework therefore sought to reduce reliance on external ratings, including by placing the SEC-IRBA at the top of the securitisation hierarchy of methods, and by incorporating additional risk drivers into the SEC-ERBA (ie maturity and tranche thickness for non-senior exposures). However, as mentioned above, the BCBS, unlike the EU and UK CRR, still placed the SEC-ERBA (and SEC-IAA) above the SEC-SA.

3.11 The PRA considers that following the global financial crisis, there have been positive reforms aimed at better regulation of ECAIs. These include the Credit Rating Agencies Regulation.^{footnote [9]} Also, Article 270d of the CRR regulates firms’ use of credit assessments by ECAIs of securitisation positions, discouraging ‘rating shopping’. The PRA expects that these measures would mitigate the risks posed to the safety and soundness of PRA-authorised firms from requiring the use of the SEC-ERBA in a wider range of circumstances.

3.12 The PRA also considers that the SEC-ERBA is generally more risk-sensitive than the SEC-SA. The SEC-SA only recognises a limited number of characteristics of securitisation exposures and data inputs in the calculation of capital requirements. ECAIs have access to an extensive range of data and can consider a wider range of characteristics of securitisation exposures not captured in the SEC-SA. ECAIs may be able to take into account at least some of the characteristics and inputs recognised by the SEC-IRBA that are not allowed for by the SEC-SA. The PRA also notes in supervisory statement (SS)10/18 – Securitisation: General requirements and capital framework, in connection with the exercise of the discretions described in paragraph 3.5 above, that there are characteristics of securitisation exposures which are not explicitly captured in the formulas of either the SEC-SA or SEC-IRBA. These include features not adequately captured in the underlying credit risk framework. An example would be concentration risk in the underlying portfolio. It is possible that a risk assessment by an ECAI takes account of such matters. In that regard, placing the SEC-ERBA above the SEC-SA in the securitisation hierarchy of methods could advance the safety and soundness of PRA-authorised CRR firms.

3.13 The PRA has limited information on the potential capital impacts of changing the securitisation hierarchy of methods to better align with the Basel standards. The SEC-ERBA can only be used for securitisation exposures for which an external or inferred rating meeting certain requirements is available. However, some firms that currently use the SEC-SA for rated securitisation positions could experience a capital impact if they have to switch to the SEC-ERBA. Also, firms that use the SEC-IRBA for rated securitisation positions could be affected when calculating the output floor and having to use the SEC-ERBA instead of the SEC-SA for this purpose.

3.14 Any change to the securitisation hierarchy of methods in the UK would require firms to adjust their systems and processes. This could result in a one-off cost. However, simplifying the securitisation hierarchy of methods could also slightly reduce ongoing operational requirements and scope for errors in calculating risk-weights.

3.15 The PRA would like to understand the impacts of potentially changing the securitisation hierarchy of methods to better align with the Basel standards to assess whether it would facilitate competitiveness and growth, and whether it would be proportionate to any potential gains in terms of safety and soundness of PRA-authorised firms with securitisation exposures. This would also help the PRA in assessing the implications for competition.

3.16 The PRA considers that, if the p-factor in the SEC-SA was adjusted (as discussed in Chapter 2), this could affect the impacts of changing the securitisation hierarchy of methods to better align with the Basel standards. This may raise questions about the calibration of the SEC-ERBA relative to the SEC-SA. The PRA considers that these questions could usefully be addressed as part of a BCBS review of the securitisation capital framework.

Q6: What would be the initial and ongoing impact on: (i) capital requirements; (ii) operational requirements; and (iii) securitisation structures of changing the UK securitisation hierarchy of methods to better align with Basel standards? Please provide any data on these impacts.

4: The scope of the framework for STS securitisations

4.1 This chapter considers the scope of the UK STS framework, focusing on the preferential capital treatment available for PRA-authorised CRR firms’ exposures to STS securitisations under the CRR. In line with Basel standards, only qualifying traditional securitisations can currently benefit from this treatment. The PRA explains its view that extending this treatment to synthetic securitisations would not on the whole advance its objectives, and invites feedback.

4.2 For the purposes of this chapter, a traditional securitisation is a securitisation involving the transfer of the economic interest in the exposures being securitised through the transfer of ownership of those exposures from the originator to a securitisation special purpose entity (SSPE) or through sub-participation by an SSPE, where the securities issued do not represent payment obligations of the originator. A synthetic securitisation is a securitisation where the transfer of risk is achieved by the use of credit derivatives or guarantees, and the exposures being securitised remain exposures of the originator.

The Basel framework for simple, transparent and comparable (STC) securitisations and its implementation in the UK

The Basel STC framework

4.3 The Basel standards include criteria for identifying securitisations as STC^{footnote [10]} and provide for preferential capital treatment for banks’ exposures to such STC securitisations.^{footnote [11]}

4.4 The original purpose of the STC criteria was to assist in the financial industry's development of STC securitisations. The STC criteria were designed to help the parties to such securitisations to evaluate risks and to assist investors with their conduct of due diligence. However, they were not intended to serve as a substitute for investors' due diligence. Broadly, the STC criteria relate to matters such as the relative homogeneity of underlying assets with simple characteristics and a structure that is not overly complex (simplicity), the provision of information about a securitisation (transparency) and comparability across similar securitisation products within an asset class (comparability). The BCBS noted that the criteria are non-exhaustive and that additional and/or more detailed criteria may be necessary based on specific needs and applications.^{footnote [12]}

4.5 The BCBS noted that compliance with the STC criteria should provide additional confidence in the performance of the transactions, and thereby warranted a modest reduction in minimum capital requirements for exposures to STC securitisations.^{footnote [13]}

The UK STS framework

4.6 In the UK, the Basel STC framework has been implemented by means of the Securitisation Regulation and the CRR.^{footnote [14]}

4.7 The Securitisation Regulation^{footnote [15]} specifies general requirements applicable to all securitisations and additional requirements for designating securitisations as STS:

• the securitisations need to meet the STS criteria. Like the Basel STC criteria, these exclude synthetic securitisations;
• they must have been notified to the FCA and must be included in a list of STS securitisations maintained by the FCA; and
• certain requirements regarding whether the originator and/or sponsor is established in the UK need to be met.

Traditional EU STS securitisations continue to be recognised as STS in the UK under transitional provisions, which are due to expire on 31 December 2024. The Securitisation Regulation is due to be replaced with FCA and PRA rules and legislation in 2024, with the FCA taking responsibility for the STS criteria.^{footnote [16]}

4.8 The CRR^{footnote [17]} sets out criteria that need to be met for STS securitisations to qualify for preferential capital treatment. The PRA considers that, in summary, these aim to ensure that preferential capital treatment for STS securitisations does not result in undue prudential risk due to higher credit risk or lumpiness of the underlying exposures. Where these criteria are met, the CRR^{footnote [18]} sets out STS-specific adjustments to the SEC-IRBA, SEC-SA and SEC-ERBA. In the case of the SEC-SA, the p-factor is 0.5 for an exposure to an STS securitisation (instead of 1 for an exposure to a non-STS securitisation), and the risk weight floor is 10% for STS securitisations (instead of 15% for non-STS securitisation). The adjustments to the SEC-ERBA and SEC-IRBA for exposures to STS securitisations also provide incentives for STS securitisations. As mentioned in Chapter 1, these provisions in the CRR are expected to be replaced with PRA rules.

Developments in the EU and questions about the scope of the UK STS framework

4.9 From 9 April 2021, the EU deviated from the Basel standards by extending its STS framework to qualifying synthetic securitisations.^{footnote [19]} This allows some EU synthetic (including SRT) securitisations to be designated as STS and to benefit from preferential capital treatment. As of 31 December 2022, the ESMA STS register showed 586 traditional STS notifications and 54 synthetic STS notifications. ESMA (2023) – The EU securitisation market – an overview noted that the latter is growing rapidly.

4.10 HMT’s 2021 Securitisation Regulation Review noted that respondents to its Call for Evidence called for the extension of the UK STS framework to allow various types of securitisations to be eligible for STS designation, including synthetic securitisations. The Securitisation Regulation Review stated that HMT and the regulators took interest in the extent to which such a measure would benefit real economy lending and UK competitiveness. However, it also noted that the expansion of the STS framework to include synthetic securitisations appeared to provide insufficient risk reduction relative to the lower capital requirements that STS securitisations were eligible for. Therefore, HMT and the regulators were not minded to pursue this suggestion.

PRA views on extending the UK STS framework to synthetic securitisations

4.11 The PRA remains of the view that extending the preferential capital treatment for STS securitisations currently set out in the Securitisation Chapter of the CRR to qualifying synthetic securitisations when replacing it with PRA rules would not, on the whole, advance its objectives. It would also deviate from the Basel STC standards. However, the PRA invites feedback.

Policy considerations

4.12 The PRA considers that synthetic securitisations are typically bespoke structures placed privately with sophisticated investors. Credit risk in synthetic securitisations is transferred by means of a derivative contract or guarantee, and this introduces complexity related to the details of the contractual arrangements chosen. SS9/13 – Securitisation: Significant Risk Transfer mentions some of the more complex structural features of synthetic SRT securitisations. It is also not clear to what extent synthetic securitisations are amenable to standardisation in relation to their structural features. It is also doubtful how much value investors in these securitisations would place on additional transparency beyond what is available under requirements applicable to all (STS and non-STS) securitisations. This raises questions about the scope for, and the potential benefits to parties to synthetic securitisations of, developing STS criteria for synthetic securitisations.

4.13 The PRA is also concerned that extending the preferential capital treatment currently available for exposures of STS securitisations under the CRR to synthetic securitisations could pose risks to the safety and soundness of PRA-authorised firms. In particular, it could result in capital requirements for originators’ retained exposures to qualifying synthetic SRT securitisations that are not commensurate to the risk transferred to investors.

4.14 The PRA notes wider concerns around the level of capital ‘non-neutrality’ in the Pillar 1 securitisation capital framework in Chapter 2. However, the PRA does not consider that these would be best addressed by extending the STS framework to synthetic securitisations, which would reduce capital requirements only for a subset of synthetic securitisations.

4.15 The PRA does not consider it to be very likely that an STS framework that treats synthetic STS securitisations like traditional STS securitisations, despite material differences in risk, would facilitate competition.

4.16 The PRA appreciates that extending the UK STS framework to synthetic securitisations would be advantageous for UK manufacturers of any synthetic securitisations that would then qualify as STS. However, such an extension of the UK STS framework would not advance the PRA’s primary objective to promote the safety and soundness of firms as much and would result in a deviation from Basel standards. The PRA’s secondary competitiveness and growth objective is subject to compliance with such standards.

4.17 The PRA also has regard to the regulatory principle that the resources of each regulator need to be used in the most efficient and economic way. Extending the UK STS framework to synthetic securitisations in the UK would likely place considerable demands on PRA and FCA resources.

Q7: Do you have any feedback on the PRA’s views on the scope of the UK STS framework? Please provide any supporting evidence.

5: The use of credit risk mitigation in synthetic SRT securitisations

5.1 As set out in SS9/13 – Securitisation: Significant Risk Transfer, SRT is an ongoing requirement. Accordingly, the PRA expects firms to ensure that any reduction in capital requirements achieved through securitisation continues to be matched by a commensurate transfer of risk throughout the life of the transaction. The PRA expects firms to take a substance over form approach to assessing SRT. Firms should be able to demonstrate that the capital relief post-transaction adequately captures the economic substance of the entire transaction, and is commensurate to the retained risks.

5.2 The PRA would like to gather information on credit risk mitigation (CRM) in synthetic SRT securitisations. This will assist the PRA in identifying and understanding any prudential risks from CRM practices in SRT securitisations and, if necessary, in considering policies to mitigate these risks. This is consistent with the PRA’s evidence-based policy making approach.

5.3 CRM is used by firms to reduce the credit risk associated with an exposure or exposures that the firm continues to hold. The CRR allows firms to reflect two forms of eligible CRM in their RWAs:

• unfunded credit protection is a type of CRM that reflects the promise from a third party to pay when a borrower or counterparty defaults; and
• funded credit protection is a type of CRM that reflects financial or non-financial collateral held against an exposure, which the firm can retain or liquidate in case of the default of a borrower or counterparty. It also includes the use of on-balance sheet netting and master netting agreements.

5.4 According to the CRR,^{footnote [20]} a synthetic securitisation will achieve SRT only if (among other conditions) the credit protection by virtue of which credit risk is transferred complies with Article 249. This states that an institution may recognise funded or unfunded credit protection with respect to a securitisation position where the requirements in the Securitisation Chapter and Chapter 4 (Credit risk mitigation) of Part Three, Title II of the CRR are met. This means that special requirements for the recognition of CRM apply in a securitisation context. For example, most eligible providers of unfunded credit protection need to meet certain requirements regarding the credit quality of the credit assessment assigned to them by a recognised ECAI.

5.5 The PRA understands that UK originators of SRT securitisations generally use CRM in the form of funded credit protection. The PRA would like to engage with SRT market participants to better understand current market practice and also market interest in using unfunded CRM in SRT securitisations.

5.6 The PRA would also like to understand more fully the potential prudential risks associated with the use of unfunded CRM in SRT securitisations. These include, for example but not limited to: (i) a risk of late payment or non-payment of the credit protection amount when a borrower or counterparty defaults; and (ii) a risk that the unfunded CRM provider may be downgraded and then cease to be eligible to provide unfunded credit risk mitigation, necessitating alternative arrangements to continue to achieve SRT.

5.7 The PRA would also like to better understand how such risks could be mitigated, including through contractual features of unfunded CRM, so that unfunded credit protection remains robust and that SRT continues to be achieved on an on-going basis as per SS 9/13.

Q8: What is the appetite of bank originators for buying funded or unfunded credit protection in synthetic SRT securitisation?

• What are the pros and cons to originators of funded versus unfunded credit protection in synthetic SRT securitisation?
• Which assets, structures and levels of tranches in the capital stack are attractive for achieving SRT or additional credit protection in an unfunded way and why?

Q9: What is the appetite of credit protection providers for extending funded or unfunded credit protection in synthetic SRT securitisation?

• What are the pros and cons to credit protection providers of extending funded or unfunded credit protection in synthetic SRT securitisation?
• Who might be the providers of unfunded and funded credit protection? Are there any specific impediments to insurance companies from extending credit protection to synthetic SRT securitisation?
• Which assets, structures and levels of tranches in the capital stack are attractive for extending unfunded credit protection?

Q10: How and to what extent might contractual arrangements mitigate any prudential risks posed by unfunded CRM in SRT securitisations?

6: Questions

Q1: To what extent do firms expect to be able to mitigate the potential impact of the output floor on securitisation exposures, including retained tranches of SRT securitisations? Please provide estimates of costs and benefits and / or illustrative examples.

Q2: How do you consider that option 2 could be developed?

Q3: To what extent could the p-factor be reduced while meeting the constraints set out in paragraph 2.36? Please provide evidence that would support this assessment. Are there other constraints that the PRA should consider?

Q4: To what extent could option 2 address industry feedback about the interaction between the output floor and Pillar 1 capital requirements?

Q5: What are your views of the different policy options in relation to the interaction between the output floor and Pillar 1 framework for determining capital requirements for securitisation exposures?

Q6: What would be the initial and ongoing impact on: (i) capital requirements; (ii) operational requirements; and (iii) securitisation structures of changing the UK securitisation hierarchy of methods to better align with Basel standards? Please provide any data on these impacts.

Q7: Do you have any feedback on the PRA’s views on the scope of the UK STS framework? Please provide any supporting evidence.

Q8: What is the appetite of bank originators for buying funded or unfunded credit protection in synthetic SRT securitisation?

• What are the pros and cons to originators of funded versus unfunded credit protection in synthetic SRT securitisation?
• Which assets, structures, levels of tranches in capital stack are attractive for achieving SRT or additional credit protection in an unfunded way and why?

Q9: What is the appetite of credit protection providers for extending funded or unfunded credit protection in synthetic SRT securitisation?

• What are the pros and cons to credit protection providers of extending funded or unfunded credit protection in synthetic SRT securitisation?
• Who might be the providers of unfunded and funded credit protection? Are there any specific impediments to insurance companies from extending credit protection to synthetic SRT securitisation?
• Which assets, structures, levels of tranches in capital stack are attractive for extending unfunded credit protection?

Q10: How and to what extent might contractual arrangements mitigate any prudential risks posed by unfunded CRM in SRT securitisations?