Operational requirements for use of external credit assessments
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.
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).
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.
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.
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.
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.
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.