• PRU 4.14 PRU 4.14 Securitisation

    • Application

      • PRU 4.14.1

        This Section applies to an Authorised Person which:

        (a) acts as an Originator in a securitisation;
        (b) transfers Credit Risk on a single item or on a pool of items by any of the legal transfer methods set out in Rule A4.10.1;
        (c) acts as a Sponsor in a securitisation; or
        (d) provides Credit Enhancement, liquidity support, or Underwriting or dealing facilities relating to the items being transferred.

    • Interpretation

      • PRU 4.14.2 PRU 4.14.2

        For the purposes of this Chapter and App4, "securitisation" includes Traditional Securitisation, Synthetic Securitisation and Re-securitisation, as defined below:

        (a) A Traditional Securitisation is a structure where the cash flow from an underlying pool of Exposures is used to service at least two different stratified risk positions or tranches reflecting different degrees of Credit Risk. Payments to the investors depend upon the performance of the specified underlying Exposures, as opposed to being derived from an obligation of the entity originating those Exposures. A Traditional Securitisation will generally assume the movement of assets off balance sheet.
        (b) A Synthetic Securitisation is a structure with at least two different stratified risk positions or tranches that reflect different degrees of Credit Risk where Credit Risk of an underlying pool of Exposures is transferred, in whole or in part, through the use of funded (e.g. CLNs) or unfunded (e.g. credit default swaps) Credit Derivatives or guarantees that serve to hedge the Credit Risk of the portfolio. Accordingly, the investors' potential risk is dependent upon the performance of the underlying pool. A Synthetic Securitisation may or may not involve the removal of assets off balance sheet.
        (c) A Re-securitisation Exposure is a securitisation Exposure in which the associated underlying pool of Exposures is tranched and at least one of the underlying Exposures is a securitisation Exposure. In addition, an Exposure to one or more Re-securitisation Exposures is a Re-securitisation Exposure.

        • Guidance

          The Regulator would treat other techniques to achieve the financing or re-financing of assets which are legally transferred to a scheme, by packaging them into a tradable form through the issue of Securities which are secured on the assets and serviced from the cashflows which they yield as "securitisation".

    • Systems and controls for the use of securitisations

      • PRU 4.14.3

        An Authorised Person must implement and maintain appropriate risk management systems to identify, manage, monitor and, where applicable, control all risks in relation to a securitisation transaction whether the firm is an investor, Originator or Sponsor. In particular, such risk management systems should effectively address the following risks:

        (a) the liquidity and capital implications that may arise from the items returning to the balance sheet;
        (b) the Operational Risks that may arise under a securitisation; and
        (c) reputational risks that may arise as a result of its securitisation activities.

      • PRU 4.14.4

        An Authorised Person must have appropriate policies and procedures to ensure that the economic substance of the transaction is fully reflected in the process of managing the risks arising from such transactions. An Authorised Person must have appropriate policies and procedures in place to document its systems and controls in relation to securitisation risks. These policies should include details on the capital effects of the securitisation as set out in this Chapter.

      • PRU 4.14.5 PRU 4.14.5

        An Authorised Person must conduct periodic stress tests in relation to its securitisation activities and off balance sheet Exposures, including testing of future ability to transact securitisation as a means of CRM or for liquidity purposes.

        • Guidance

          1. The periodic stress testing in relation to securitisation activities referred to in Rule 4.14.5 should consider the firm-wide impact of those activities and Exposures in stressed market conditions and the implications for other sources of risk. Such stress tests should include both existing securitisation Exposures and transactions in the pipeline, as there is a risk of the pipeline transactions not being completed in a stressed market scenario.
          2. The frequency and extent of stress testing to fulfil the requirements of Rule 4.14.5 should be determined on the basis of the materiality of the Authorised Person's securitisation volumes and its off-balance sheet Exposures.
          3. An Authorised Person should have procedures in place to assess and respond to the results produced from the stress testing and these should be taken into account under the ICAAP.

      • PRU 4.14.6 PRU 4.14.6

        In order to qualify for using the Rules specified in this Section, and particularly the risk weighting approach outlined below, an Authorised Person must demonstrate the following:

        (a) a comprehensive understanding of the risk characteristics of its individual securitisation Exposures, whether on balance sheet or off balance sheet, as well as the risk characteristics of the pools underlying securitisation Exposures;
        (b) ability to access the performance information on the underlying pools on an on-going basis in a timely manner; and
        (c) a thorough understanding of all structural features of a securitisation transaction that would materially impact the performance of the Authorised Person's Exposure to the transaction, such as waterfall triggers, Credit Enhancements, liquidity enhancements, market value triggers and deal specific definitions of default.

        • Guidance

          1. An Authorised Person which is an investor, Originator or Sponsor of a Securitisation should fully understand the risks it has assumed in order to ensure that it can accurately determine the Capital Requirements for the Exposures arising from the securitisation in accordance with the Rules in this Section.
          2. For the purposes of Rule 4.14.6(b) information should include the percentage of loans 30, 60, 90 days past due, default rates, prepayment rates, loans in foreclosure, property type, occupancy, average credit score etc. For Re-securitisations, Authorised Persons should have information relating to not only the underlying securitisation transactions but also the characteristics and performance of the underlying pools of such transactions.

      • PRU 4.14.7 PRU 4.14.7

        Where an Authorised Person is either an Originator or a Sponsor of a Traditional Securitisation or a Synthetic Securitisation:

        (a) the Authorised Person intending to conduct the securitisation must notify the Regulator at least 30 days in advance of the proposed execution of the securitisation;
        (b) the Authorised Person conducting the securitisation must calculate its Credit RWAs for all resultant Exposures from that securitisation, in accordance with Section 4.8, provided the requirements of this Section are met; and
        (c) the Authorised Person conducting the securitisation must produce documentation reflecting the execution and economic substance of the transaction.

        • Guidance

          The notification made to the Regulator under (a) should include, inter alia, amounts of assets subject to securitisation, amounts retained, details of securitisation including legal structure, rating, tranches, details of legal transfer and any CRM applied and implications on the capital and liquidity position on the Authorised Person.

    • Calculation of Credit RWA arising from securitisations

      • PRU 4.14.8 PRU 4.14.8

        An Authorised Person must calculate the Credit RWA amounts for Exposures arising from securitisations according to the requirements in this Section.

        • Guidance

          1. An Authorised Person should apply the securitisation framework set out in this Section for determining the Capital Requirements on Exposures arising from traditional and Synthetic Securitisations or similar structures that contain features common to both.
          2. This Section sets out the requirements for Originators, Authorised Persons which transfer Credit Risk from their balance sheets and Sponsors in a securitisation transaction involving Non-Trading Book Exposures. This Section also sets out the methodologies for calculation of RWA amounts for securitisation Exposures. The Rules setting out the methodologies for calculation of Market Risk Capital Requirement amounts for securitisation Exposures held in the Trading Book are specified in Chapter 5 and App5 of these Rules.
          3. As securitisations may be structured in many different ways, an Authorised Person engaging in the activities relating to securitisations (whether traditional or a Synthetic Securitisation) must ensure that the economic substance of the transaction is fully considered, and reflected, in determining the capital treatment of a securitisation, rather than relying on the legal form of the Securitisation.

      • PRU 4.14.9

        An Authorised Person is required, subject to Rule 4.14.12, to include all securitisation Exposures in its calculation of Credit RWAs relating to securitisations, including the following:

        (a) those arising from the provision of Credit Risk mitigants to a securitisation;
        (b) investments in asset backed Securities;
        (c) retention of a subordinated tranche;
        (d) extension of a liquidity facility; and
        (e) extension of Credit Enhancement.

      • PRU 4.14.10

        An Authorised Person must include in its calculation of Credit RWA all of its securitisation Exposures held in the Non-Trading Book, except for those securitisation Exposures which the Authorised Person is required to include as deductions from T1 Capital and deductions from T2 Capital.

      • PRU 4.14.11

        Repurchased securitisation transactions must be treated as retained securitisation Exposures.

    • Deductions

      • PRU 4.14.12

        (1) An Authorised Person may deduct SE Exposures which it has chosen not to treat in accordance with Rules 4.14.8 to 4.14.11 from Capital Resources -100% from CET1.
        (2) Credit-Enhancing Interest-Only Strips (net of the deductions from CET1 Capital required at Rule 4.14.13) are deducted 100% from CET1 Capital.
        (3) Deductions from capital may be calculated net of specific provisions taken against relevant securitisation Exposures.

      • PRU 4.14.13 PRU 4.14.13

        An Authorised Person must include as deductions from CET1 Capital any increase in issued capital or reserves resulting from a securitisation, such as that associated with expected future margin income resulting in a gain-on-sale that is recognised as issued capital or reserves.

        • Guidance

          Gain-on-sale arises when there has been an increase in equity of the Authorised Person associated with recognising the discounted value of the expected future margin income as part of regulatory capital.

      • PRU 4.14.14

        An Authorised Person must assign a securitisation Exposure to a Credit Quality Grade based on the external credit assessment (where available) that is applicable to the securitisation Exposure in accordance with relevant Rules in this Chapter.

    • Implicit Support

      • PRU 4.14.15

        An Originator or a Sponsor of a securitisation must not provide Implicit Support to a securitisation transaction with a view to reducing potential or actual losses to investors outside of its contractual obligations;

      • PRU 4.14.16

        If an Originator fails to comply with Rule 4.14.15 in respect of a securitisation, it:

        (a) must include all the underlying Exposures of the securitisation in its calculation of Credit RWAs as if those Exposures had not been securitised and were on the balance sheet of the Authorised Person;
        (b) must not recognise any gain-on-sale of assets to the securitisation; and
        (c) must disclose to investors that the Authorised Person has provided noncontractual support and the regulatory capital impact of doing so.

    • Requirements in order for a Traditional Securitisation to be excluded from the calculation of RWA

      • PRU 4.14.17

        (1) An Authorised Person which is an Originator or a Sponsor of a Traditional Securitisation may exclude securitised Exposures from the calculation of Credit RWA amounts only if all of the conditions detailed in Rule A4.10.1 have been complied with.
        (2) An Authorised Person meeting the requirements specified in Rule A4.10.1 must hold regulatory capital against any securitisation Exposures it retains.

    • Requirements in order for a Synthetic Securitisation to be excluded from the calculation of RWA

      • PRU 4.14.18 PRU 4.14.18

        (1) An Authorised Person which is an Originator or a Sponsor of a Synthetic Securitisation may recognise the effects of CRM of the Synthetic Securitisation in calculating its SE Exposure RWAs, only if:
        (a) all of the conditions detailed in Rule A4.10.2 have been complied with;
        (b) the effects of CRM are obtained through eligible credit protection, eligible financial Collateral or both; and
        (c) Credit Risk is transferred to third parties.
        (2) In relation to (b), the CRM techniques used must meet the requirements of Section 4.13.

        • Guidance

          In relation to (1)(c) the transferor is deemed to have effective control over the transferred Credit Risk Exposures if it has the ability to repurchase the assets, or is obliged to retain the risk of the transferred assets. This does not include the retention of servicing rights.

      • PRU 4.14.19

        (1) An Authorised Person meeting the conditions in Rule 4.14.18 must still hold regulatory capital against any securitisation Exposures it retains.
        (2) The Authorised Person may recognise the effects of CRM of eligible financial Collateral pledged by any SPE, but it may not recognise any SPE which is an Issuer of securitisation Exposures as an eligible protection provider.

    • Operational requirements for use of external credit assessments

      • PRU 4.14.20

        The external credit assessment used for determining the applicable risk weight for a CR Exposure must be determined by taking into account the entire amount of Credit Risk (principal and interest) an Authorised Person is exposed to.

      • PRU 4.14.21

        Credit assessments can only be considered from an ECAI, and must meet the following criteria:

        (a) any credit assessments used for the purposes of risk weighting must be publicly available;
        (b) the external credit rating agencies must have expertise and market acceptance in rating securitisations of the nature being used for risk weighting purposes;
        (c) Authorised Persons must apply external credit rating agency ratings consistently to all tranches of securitisations;
        (d) where an Exposure has two ratings from external credit rating agencies the less favourable rating must be used; and
        (e) where an Exposure has more than two assessments by external credit rating agencies the two most favourable ratings can be selected, the review of these assessments is then determined in line with (d).

      • PRU 4.14.22

        Where any CRM has been considered as part of any rating applied to a tranche of a securitisation, the risk weighting should be used and no additional capital recognition is permitted.

      • PRU 4.14.23

        An Authorised Person must treat any securitisation Exposure as an unrated Exposure where:

        (a) the external credit assessment incorporates the credit protection provided directly to the SPE by a protection provider which is not an eligible protection provider;
        (b) the external credit assessment is at least partly based on unfunded support provided by the Authorised Person itself (e.g. if an Authorised Person buys ABCP) where it provides an unfunded securitisation Exposure extended to the ABCP Programme, such as a liquidity facility or Credit Enhancement, and that Exposure plays a role in determining the credit assessment on the ABCP, the Authorised Person must treat the ABCP as if it were not rated and continue to hold capital against the other securitisation Exposures it provides);
        (c) the Credit Risk mitigant is not obtained by the SPE but is separately obtained and applied to a specific securitisation Exposure (e.g. a particular tranche); or
        (d) the CRM does not meet the eligibility criteria for mitigation specified in Section 4.13.

      • PRU 4.14.24

        Where CRM is applied to a specific Exposure within a securitisation the Authorised Person must treat the Exposure as unrated, and then use the mitigation as set out in Section 4.13 should the Rules contained in that Section apply.

      • PRU 4.14.25

        An Authorised Person must not use an external credit rating agency rating for risk weighting purposes where the assessment is at least partly based on unfunded support provided by the Authorised Person itself.

      • PRU 4.14.26

        The treatment outlined in Rule 4.14.24 also applies to Exposures in the Authorised Person's Trading Book. An Authorised Person's Capital Requirement for such Exposures held in the Trading Book can be no less than the amount required under the Non-Trading Book.

    • Calculation of RWA amounts for securitisation Exposures

      • PRU 4.14.27

        (1) In order to calculate the RWA amount for a securitisation position, the relevant risk weight must be assigned to the Exposure value of the position in accordance with this Section, based on the credit quality of the position.
        (2) For the purposes of this Rule, the credit quality of a position must be determined by reference to the applicable credit quality assessment from a recognised external credit rating agency.

      • PRU 4.14.28

        In cases where there are Exposures to different tranches in a securitisation, the Exposure to each tranche must be considered a separate securitisation position.

      • PRU 4.14.29

        Exposure value of an off-balance sheet securitisation position must, subject to A4.2.2, be its nominal value multiplied by a CCF of 100%, wherever applicable.

      • PRU 4.14.30

        The Exposure value of a securitisation position arising from a financial Derivative must be determined in accordance with Rules 4.6.14 to 4.6.21 dealing with treatment of financial Derivatives.

    • Assigning risk weights

      • PRU 4.14.31

        An Authorised Person must assign a risk weight for any SE Exposure in accordance with the tables below, to calculate the Credit RWA amounts for that Exposure.

        Risk Weights for Long-Term securitisation Exposures

        Long Term rating category
        Credit Quality Grade 1 2 3 4 5 and above including unrated
        Risk Weight to be applied to securitisation Exposures (excluding Re-securitisation Exposures) 20% 50% 100% 350% 1000% or Deduction from Capital Resources
        Risk weight applied to Re-securitisation Exposures 40% 100% 225% 650% 1000% or Deduction from Capital Resources

        Risk Weights for Short-Term securitisation Exposures

        Short-term rating category
        Credit Quality Grade I II III IV and above including unrated
        1000%
        Risk Weight to be applied 20% 50% 100% 1000%
        Deduction from Capital Resources Risk Weight applied to Re-securitisation Exposures 40% 100% 225% 1000% or deduction from Capital Resources

      • PRU 4.14.32

        (1) In respect of securitisation positions which are assigned a 1000% risk weighting pursuant to the tables in Rule 4.14.31, an Authorised Person may as an alternative to including the position in its calculation of Credit RWA amounts, deduct from its CET1 Capital the Exposure value of such positions.
        (2) For the purposes of this Rule, the calculation of the Exposure value may reflect eligible funded credit protection consistent with applicable Rules in this Chapter.

      • PRU 4.14.33

        For an Authorised Person that is an Originator or Sponsor of a securitisation, the Credit RWA amounts calculated for its securitisation positions may be limited to the RWA amounts which would be calculated for the SE Exposures had they not been securitised subject to the presumed application of a 150% risk weight to all past due items and items belonging to regulatory high risk categories.

      • PRU 4.14.34

        Not currently in use.

      • PRU 4.14.35

        Not currently in use.

    • Exceptions to deduction of unrated securitisation Exposures

      • PRU 4.14.36

        In accordance with the tables under Rule 4.14.31, all unrated securitisation positions must be deducted or risk weighted at 1000% with the following exceptions:

        (a) most senior Exposure in a securitisation;
        (b) Exposures that are in a second loss position or better of an ABCP and meet the requirements of Rule 4.14.41; and
        (c) eligible liquidity positions.

    • Most senior Exposure in a securitisation

      • PRU 4.14.37

        An Authorised Person wishing to apply the treatment referred to in Rule 4.14.37 must notify the Regulator, in writing, at least 30 days in advance, of the intention to adopt this treatment. The notification should include the treatments being adopted and the weightings applied under the provision.

      • PRU 4.14.38

        The resulting weighted average risk weight must not be higher than 1000% or lower than the risk weight applicable to a more senior tranche which is rated.

      • PRU 4.14.39

        An Authorised Person must have systems and controls in place to monitor effectively the composition of Exposures where the look-through provision has been applied on an ongoing basis.

      • PRU 4.14.40

        An Authorised Person may apply a risk weight of 100% or the highest risk weight assigned to any of the underlying Exposures in the ABCP Programme, whichever is higher, to an unrated securitisation Exposure arising from the ABCP Programme, provided the securitisation position complies with the following conditions:

        (a) the subject securitisation Exposure must be in a tranche which is economically in a second loss position or better and the First Loss Position must provide meaningful credit protection to the second loss tranche;
        (b) the associated Credit Risk of the securitisation Exposure is the equivalent of a Credit Quality Grade of III or better in the short-term rating category; and
        (c) the Authorised Person must not hold a position in the First Loss Position.

    • Exposures that are in a second loss position or better of an ABCP

      • PRU 4.14.41

        An Authorised Person providing an unrated eligible liquidity facility may assign to the resulting securitisation Exposure the highest risk weight that would be applied to any of the underlying Exposures covered by the facility.

    • Eligible liquidity positions

      • PRU 4.14.42

        (1) An off balance sheet SE Exposure will receive a 100% CCF unless:
        (a) the Exposure qualifies as an eligible liquidity facility, or
        (b) the Exposure is an eligible Servicer cash advance facility.
        (2) In relation to (1), an eligible Servicer cash advance facility is a facility provided to a securitisation in order to ensure uninterrupted flow of payments to investors. As long as the Servicer is entitled to full reimbursement and this right is senior to all other claims on cash flows from the underlying pool of Exposures, and where these facilities meet the requirements of 4.14.44 and are unconditionally cancellable at any time, any undrawn commitments can then have a 0% CCF applied.

      • PRU 4.14.43

        (1) For the purposes of Rule 4.14.42, an Authorised Person may treat an Exposure as an eligible liquidity facility provided the following requirements are met:

        (a) the liquidity facility documentation must clearly identify and limit the circumstances under which it may be drawn;

        (b) draws must be limited to the amount that is likely to be repaid from the liquidation of the underlying Exposures and any seller provided Credit Enhancements;

        (c) the facility must not provide credit support by covering for any losses incurred in the underlying pool of Exposures prior to drawdown;

        (d) the facility must not be structured to provide regular or permanent funding;

        (e) the facility must be subject to an asset quality test to preclude it being used to cover Credit Risk Exposures that are in default;

        (f) where the facility is used to fund externally rated Securities the facility can only be used to fund Securities that are externally rated Investment Grade at the time of funding;

        (g) the facility cannot be drawn after all Credit Enhancements from which the liquidity facility would benefit have been exhausted; and

        (h) repayment of draws of the facility cannot be subordinated to any interests of any note holder in the programme or be subject to deferral or waiver.

        (2) Where the Exposure meets the requirements as set out in (1), the following CCF will apply:

        (a) 50% to the eligible liquidity facility regardless of maturity; and

        (b) 100% if an external rating of the liquidity facility is used for the risk weighting.

      • PRU 4.14.44

        (1) An Authorised Person which provides credit protection for a basket of reference Exposures through an unrated first-to-default Credit Derivative may apply to the securitisation Exposure the aggregate of the risk weights that would be assigned to the reference Exposures, provided that the resulting Capital Requirement does not exceed the notional amount of the credit protection.
        (2) An Authorised Person which provides credit protection for a basket of reference Exposures through an unrated second-to-default Credit Derivative may apply the treatment referred to in (1), except that in aggregating the risk weights, the reference Exposure with the lowest risk-weighted amount may be excluded.

      • PRU 4.14.45

        (1) Where an Authorised Person has two or more overlapping Exposures to a securitisation, the firm must, to the extent that the positions overlap, include in its calculation of Credit RWA amounts only the Exposure, or portion of the Exposure, producing the higher Credit RWA amounts.
        (2) For the purposes of (1), overlapping Exposures result where an Authorised Person provides two or more facilities (whether they are liquidity facilities or Credit Enhancements) in relation to a securitisation that can be drawn under various conditions with different triggers, with the result that the Authorised Person provides duplicate coverage to the underlying Exposures. The facilities provided by the Authorised Person may overlap since a draw on one facility may preclude (in part) a draw on the other facility.
        (3) Where the overlapping Exposures are subject to different conversion factors the Authorised Person must apply the higher of the conversion factors to the Exposure.

    • Overlapping Exposures

      • PRU 4.14.46 PRU 4.14.46

        Where an Authorised Person obtains credit protection on a securitisation Exposure, the calculation of Credit RWA amounts must be in accordance with the Rules in CRM in Section 4.13.

        • Guidance

          The firm may also recognise such an overlap between capital charges for Specific Risk in relation to positions in the Trading Book and capital charges for positions in the Non-Trading Book, provided that the firm is able to calculate and compare the capital charges for the relevant positions.

          However, if overlapping facilities are provided by different Authorised Persons, each Authorised Person must calculate Capital Requirement for the maximum amount of its Exposure.

    • Credit Risk mitigation

      • PRU 4.14.47

        Where an Authorised Person provides credit protection to a securitisation Exposure it must calculate a Capital Requirement as if it were an investor in the securitisation in line with Section 4.13.

      • PRU 4.14.48

        An Authorised Person must not recognise any SPE which is an Issuer of securitisation Exposures, as an eligible credit protection provider. Guarantees provided must meet the requirements of Section 4.13.

      • PRU 4.14.49

        For the purpose of setting regulatory capital against a Maturity Mismatch, the Capital Requirement must be determined in accordance with Section 4.13. When Exposures being hedged have different maturities, the longest maturity must be used. Maturity of credit protection must be calculated in accordance with Section 4.13.

      • PRU 4.14.50

        An Authorised Person which is the Originator or Sponsor of a securitisation involving revolving Exposures as well as an Early Amortisation provision, must calculate an additional RWA amount in accordance with Rule 4.14.57 to address the possibility that its Credit Risk Exposure levels may increase following the operation of the Early Amortisation provision.

    • Capital Requirements for securitisations with Early Amortisation provisions

      • PRU 4.14.51 PRU 4.14.51

        (1) An Authorised Person which is the Originator or Sponsor of a securitisation involving revolving Exposures, must calculate Credit RWA amounts in respect of the total Exposure related to a securitisation (both drawn and undrawn balances) when:
        (a) the Authorised Person sells Exposures into a structure that contains an Early Amortisation feature; and
        (b) the Exposures are of a revolving nature.
        (2) Where the underlying pool of a securitisation comprises revolving and term Exposures, an Authorised Person must apply the amortisation treatment outlined below for determining applicable regulatory capital only to that portion of the underlying pool containing revolving Exposures.

        • Guidance

          1. This Section sets out the methodology for calculation of the Credit RWA amount by an Originator, when it sells revolving Exposures into a securitisation that contains an Early Amortisation provision.
          2. Early Amortisation of the Securities describes the process whereby the repayment of the investors' interest is brought forward upon the occurrence of specified events. Events that are economic in nature by reference to the financial performance of the transferred assets are known as economic triggers.

      • PRU 4.14.52

        An Authorised Person which is the Originator of a Revolving Securitisation that includes economic triggers for Early Amortisation may regard the Exposures as transferred for the period up to the point of repayment, provided that:

        (a) during the amortisation period there is full sharing of interest, principal, expenses, losses and recoveries; and
        (b) the Authorised Person's risk management system provides warning indicators when economic or non-economic triggers may be activated.

      • PRU 4.14.53 PRU 4.14.53

        An Authorised Person is not required to calculate a Capital Requirement for Early Amortisation in the following situations:

        (a) replenishment structures where the underlying Exposures do not revolve and the Early Amortisation ends the ability of the Authorised Person to add new Exposures;
        (b) where the risk associated with revolving assets containing amortisation features that mimic term structures, where the risk does not return to the Authorised Person;
        (c) structures where the Authorised Person securitises one or more credit lines and where investors remain fully exposed to future draws by borrowers so that the risk on the underlying facilities does not return to the Originator even after an Early Amortisation event has occurred; or
        (d) where the Early Amortisation clause is solely triggered by events not related to the performance of the securitised assets or the Authorised Person, such as material changes in tax laws or regulations.

        • Guidance

          Examples of such triggers include tax events, legal changes resulting in an Authorised Person's non-performance in its role as a servicing agent, and triggers relating to the insolvency of the Originator.

      • PRU 4.14.54

        For an Authorised Person subject to the Capital Requirement referred to in Rule 4.14.51, the maximum Credit RWA calculated under that Rule must not exceed the greater of the following:

        (a) the RWA amounts calculated in respect of its positions in the investors' interest; or
        (b) the RWA amounts that would be calculated in respect of the securitised Exposures, if those had not been securitised.

      • PRU 4.14.55

        An Authorised Person must deduct from its CET1 Capital any gain-on-sale and Credit-Enhancing Interest-Only Strips arising from any securitisation subject to the provisions of the Rules above.

      • PRU 4.14.56

        In regard to securitisation positions subject to an Early Amortisation clause, the Credit RWA amounts for an Authorised Person acting as the Originator are calculated as the product of the following:

        (a) the investors' interest;
        (b) the appropriate CCF (in accordance with the table in Rule 4.14.61); and
        (c) the appropriate risk weight for the underlying Exposure type.

    • Calculation of Credit RWA amounts for securitisation positions subject to Early Amortisation clause

      • PRU 4.14.57 PRU 4.14.57

        (1) An Early Amortisation provision that does not satisfy the conditions for a Controlled Early Amortisation provision will be treated as a non-Controlled Early Amortisation provision.
        (2) For the purpose of (1), the conditions for a Controlled Early Amortisation provision are as follows:
        (a) the Authorised Person must have an appropriate capital/liquidity plan in place to ensure that it has sufficient capital and liquidity available in the event of an Early Amortisation;
        (b) throughout the duration of the transaction, including the amortisation period, there is the same pro rata sharing of interest, principal, expenses, losses and recoveries based on the firm's and investors' relative shares of the receivables outstanding at the beginning of each month;
        (c) the firm must set a period for amortisation that would be sufficient for at least 90% of the total debt outstanding at the beginning of the Early Amortisation period to have been repaid or recognised as in default; and
        (d) the pace of repayment should not be any more rapid than would be allowed by straight-line amortisation over the period set out in (c).

        • Guidance

          In relation to Rule 4.14.57(c), the Authorised Person should also consider whether a line, or facility, is committed or uncommitted. A line is considered to be uncommitted if it is unconditionally cancellable without prior notice by the Authorised Person. They also differ according to whether the securitised Exposures are committed retail credit lines or credit lines (such as revolving credit facilities).

      • PRU 4.14.58

        For uncommitted retail credit lines in securitisations containing Controlled Early Amortisation which is triggered by the Excess Spread level falling to a specified level, an Authorised Person must compare the three month average Excess Spread level with the Excess Spread levels at which the Excess Spread is required to be trapped.

      • PRU 4.14.59

        Where the securitisation does not require Excess Spread to be trapped, the trapping point is deemed to be 4.5 percentage points greater than the Excess Spread level at which Early Amortisation is triggered.

      • PRU 4.14.60

        An Authorised Person must divide the Excess Spread level by the transaction's Excess Spread trapping point to determine the appropriate segments and apply corresponding conversion factors as set out in the following table:

        Controlled Early Amortisation Features
          Uncommitted Committed
        Retail Credit Lines 3 Month average Excess Spread CCF 90%
        133.33% of trapping point or more 0%
        <133.33% to 100% of trapping point 1%
        <100% to 75% of trapping point 2%
        <75% to 50% trapping point 10%
        <50% to 25% of trapping point 20%
        <25% 40%
        Non-retail credit lines 90% 90%

      • PRU 4.14.61

        In regard to non-Controlled Early Amortisation, an Authorised Person must apply the same steps as set out at Rules 4.14.59 to 4.14.61 and determine appropriate segments and apply the corresponding conversion factors as set out in the following table:

        Non-Controlled Early Amortisation Features
          Uncommitted Committed
        Retail Credit Lines 3 Month average Excess Spread CCF 100%
        133.33% of trapping point or more 0%  
        <133.33% to 100% of trapping point 5%  
        <100% to 75% of trapping point 15%  
        <75% to 50% trapping point 50%  
        <50% of trapping point 100%  
        Non-retail credit lines 100% 100%

    • Non-Controlled Early Amortisation

      • PRU 4.14.62

        An Authorised Person need not include in its calculation of Capital Resources or Credit RWA amounts, assets transferred to:

        (a) an SPE; or
        (b) any Person, if the transfer is in connection with a securitisation under which the Issuer of the Securities is an SPE,
        provided that:
        (c) the Authorised Person does not own any Share or proprietary interest in the SPE;
        (d) no more than one member of the Governing Body of the SPE is an officer, Partner, or Employee of the Authorised Person;
        (e) the SPE does not have a name that implies any connection with the Authorised Person or any other member of the Authorised Person's Group;
        (f) the Authorised Person does not fund the SPE except where permitted under the requirements for Credit Enhancement below;
        (g) the Authorised Person does not provide temporary finance to the SPE to cover cash shortfalls arising from delayed payments or non-performance of loans transferred except where it meets the requirements for liquidity support below;
        (h) the Authorised Person does not bear any of the recurring expenses of the SPE; and
        (i) any agreements between the Authorised Person and the SPE are at market rates and at arm's length.

    • Transfers to Special Purpose Entities (SPEs)

      • PRU 4.14.63

        Where an Originator acts as Underwriter for the Securities issued, the underlying items will not be regarded as being transferred until 90% of the total issuance has been sold to third parties.

      • PRU 4.14.64

        An Originator dealing in Securities which would attract a Credit Quality Grade of 4 or better and issued by an SPE must deduct any holdings in such Securities from its CET1 Capital unless the holding is subject to:

        (a) an ongoing limit of 3% of the Securities issued; and
        (b) a limit of 10% of the Securities issued for a period of five business days:
        (i) immediately following close of the transaction; or
        (ii) in the case of Revolving Securitisations only, at the beginning of the scheduled amortisation period.

    • Dealing

      • PRU 4.14.65

        An Authorised Person acting as the Originator and holding in excess of the dealing limits in Rule 4.14.65 must either:

        (a) where the holding is less than 10%, deduct from its CET1 Capital the excess over the dealing limit; or
        (b) where the holding is greater than 10%, regard the transferred risks associated with the items as being back on its balance sheet.

      • PRU 4.14.66

        An Authorised Person acting as the Originator must not deal in the Securities during the amortisation period.

      • PRU 4.14.67

        An Authorised Person acting as the Sponsor dealing in the Securities issued by the SPE must include these Securities in the calculation of its Credit RWAs.

      • PRU 4.14.68

        An Authorised Person involved in Synthetic Securitisations must seek individual guidance on a case-by-case basis from the Regulator regarding the regulatory capital treatment of such transactions.

      • PRU 4.14.69

        An Authorised Person which has taken eligible financial Collateral for an SE Exposure and is using the FCSA may recognise the effect of the eligible financial Collateral as follows:

        (a) break down the SE Exposure into:
        (i) a collateralised portion with E equal to the latest fair market value of the eligible financial Collateral; and
        (ii) an uncollateralised portion whose Exposure value equals the E of the SE Exposure less the latest fair market value of the eligible financial Collateral; and
        (b) apply the CRW that is applicable to the eligible financial Collateral to the collateralised portion calculated in accordance with (a)(i) to calculate the Credit RWA amount of the collateralised portion as though the Authorised Person had a direct Exposure to the eligible financial Collateral; and
        (c) either:
        (i) apply the CRW that is applicable to the SE Exposure to the uncollateralised portion calculated in accordance with (a)(ii) to calculate the Credit RWA amount of the uncollateralised portion; or
        (ii) include the uncollateralised portion as a deduction from CET1 Capital.

    • Recognition of eligible financial Collateral under FCSA Approach

      • PRU 4.14.70 PRU 4.14.70

        An Authorised Person which has taken eligible financial Collateral for an SE Exposure and is using the FCSA may recognise the effect of the eligible financial Collateral as follows:

        (a) break down the SE Exposure into:
        (i) a collateralised portion with E equal to the latest fair market value of the eligible financial Collateral; and
        (ii) an uncollateralised portion whose Exposure value equals the E of the SE Exposure less the latest fair market value of the eligible financial Collateral; and
        (b) apply the CRW that is applicable to the eligible financial Collateral to the collateralised portion calculated in accordance with (a)(i) to calculate the Credit RWA amount of the collateralised portion as though the Authorised Person had a direct Exposure to the eligible financial Collateral; and
        (c) either:
        (i) apply the CRW that is applicable to the SE Exposure to the uncollateralised portion calculated in accordance with (a)(ii) to calculate the Credit RWA amount of the uncollateralised portion; or
        (ii) include the uncollateralised portion as a deduction from CET1 Capital.

        • Guidance

          Collateral in the context of a SE Exposure refers to assets used to hedge the Credit Risk of a securitisation Exposure rather than the underlying Exposures of the securitisation, including Collateral pledged by an SPE.