Prudential Regulation Authority Rulebook

3.1

The CRR provides three options for firms to demonstrate how they transfer significant credit risk for any given securitisation transaction:

1. (1) the originator does not retain more than 50% of the risk weighted exposure amounts of mezzanine securitisation positions, where these are:
   1. (i) positions to which a risk weight lower than 1,250% applies; and
   2. (ii) more junior than the most senior position in the securitisation and more junior than any position in the securitisation rated Credit Quality Step 1 or 2.
2. (2) where there is no mezzanine position, the originator does not hold more than 20% of the exposure values of securitisation positions that are subject to a deduction or 1,250% risk weight and where the originator can demonstrate that the exposure value of such securitisation positions exceeds a reasoned estimate of the expected loss on the securitised exposures by a substantial margin; and
3. (3) the competent authority may grant permission to an originator to make its own assessment if it is satisfied that the originator can meet certain requirements.

3.2

Credit Risk 3.1 in the PRA Rulebook requires a firm to notify the PRA of each transaction on which it seeks capital relief under options 1 and 2.

3.3

Where the PRA considers that the possible reduction in RWEA achieved via the securitisation is not justified by a commensurate transfer of risk to third parties, then the PRA will find SRT has not been achieved. Consequently, firms will not be able to recognise any reduction in RWEA from the transaction.

(CRR Articles 243, 244 and 337)

3.4

The PRA intends to grant permission for an originator to make its own assessment of SRT only where it is satisfied that:

• in every relevant case, the reduction in capital requirements achieved would be justified by a commensurate transfer of risk to third parties;
• the firm has in place appropriately risk-sensitive policies and methodologies to assess the transfer of risk; and
• such transfer of risk to third parties is also recognised for the purposes of the firm’s internal risk management and internal capital allocation.

3.5

Where the PRA grants permission for multiple transactions, that permission will cover a defined scope of potential transactions. The permission will enable a firm (within certain limits) to carry out these transactions without notifying the PRA in each individual instance.

(CRR Articles 243, 244 and 337)

A firm seeking to achieve capital relief by deducting or applying a 1,250% risk weight to all retained positions where permitted under CRR Article 243 or 244 would not need to make a notification under Credit Risk 3.1. In such cases, a firm should consider whether the characteristics of the transaction are such that the PRA would reasonably expect prior notice of it.

(CRR Articles 243, 244)

3.7

When informing the PRA of a transaction in accordance with Credit Risk 3.1, the information should be sent simultaneously via email to the SRT notifications inbox SRT@bankofengland.co.uk and to the firm’s usual supervisory contact.

3.8

A firm’s notification should include sufficient information to enable the PRA to assess whether the possible reduction in RWEA which would be achieved by the securitisation is justified by a commensurate transfer of credit risk to third parties. Consistent with Fundamental Rule 7, the PRA expects firms to be open and cooperative and disclose any relevant information of which the PRA would reasonably expect notice. The PRA expects such information to include at least the following:

1. (a) details of the securitisation positions, including rating, exposure value and RWEA broken down by securitisation positions sold and retained;
2. (b) a copy of the SRT policy applied to the transaction, including details of the methodology and any models used to assess risk transfer;
3. (c) a statement of how all relevant risks are incorporated into the SRT assessment and how the full economic substance of the transaction is taken into consideration;
4. (d) the SRT calculation, setting out why the firm believes the capital relief proposed is commensurate with the credit risk transferred to third parties;
5. (e) details of reliance on external credit assessment institutions (ECAIs) in the SRT assessment;
6. (f) a description of the risks being retained;
7. (g) key transaction documentation and any relevant supporting documents (eg a summary of the transaction);
8. (h) copies of investor and internal presentations on the transaction;
9. (i) details of the underlying assets (including asset class, geography, tenor, rating, spread, collateral, exposure size);
10. (j) details of the transaction structure;
11. (k) details of any termination options (eg call options);
12. (l) details of the cash flow between parties involved in the transaction;
13. (m) details of the ratings and pricing of bonds issued in the transaction;
14. (n) details of any connected parties involved in the transaction;
15. (o) details of the rationale for the transaction;
16. (p) details of the CRR rules the firm is relying on; and
17. (q) details of the governance process for the transaction, including details of any committees involved in approving the transaction.

3.9

Following review of sufficient information provided by the firm, the PRA will inform the firm of its view on commensurate risk transfer. The PRA’s review will focus on the proportion of credit risk transferred – including any transaction features which undermine effective risk transfer – compared to the proportion by which RWEA is reduced as a result of the transaction. Where the PRA judges the reduction in RWEA not to be justified by a commensurate transfer of credit risk to third parties, it will inform the firm that SRT has not been achieved by this transaction. Otherwise the PRA will inform the firm that it does not object to the transaction.

3.10

The PRA does not intend to pre-approve transactions. Instead, the PRA will provide a view on whether it considers commensurate risk transfer to have been achieved at a point in time, which may be provided after a transaction has closed. The PRA may reassess its judgement of the achievement of commensurate risk transfer if the level of credit risk transfer in a transaction changes materially.

3.11

Firms may apply for permission to consider SRT to have been achieved without needing to rely on option (1) or (2). The scope of such permission may be defined to cover a number of transactions or an individual transaction.

(CRR Articles 243 and, 244 and 337)

3.12

Where a firm applies for such permission, the PRA expects the scope to be defined according to a range of characteristics, including the type of asset class and the structural features of the transaction. The characteristics that the PRA expects a firm to consider when defining the scope of a permission application include:

1. (a) asset class (eg residential or commercial mortgages, credit card receivables, leasing, loans to corporates or small and medium-sized enterprises, consumer loans, trade receivables, securitisations, Private Finance Initiative, insurance, covered bonds, other assets);
2. (b) further asset class distinction (eg geography and asset quality); and
3. (c) structural features (eg distinguishing between securitisation and re-securitisation, traditional and synthetic securitisation and non-revolving structures and revolving structures).

3.13

It is likely to be more straightforward for the PRA to assess applications for relatively narrowly scoped permissions than those covering a wide range of assets and/or with complex structural features.

3.14

In order to assess a firm’s ability to use its own policies and methodologies for assessing SRT, the PRA’s permission application reviews will focus on the following factors:

• the firm’s understanding of the risk of potential transactions within the scope of the permission, including potential underlying assets, securitisation structures and other relevant factors that affect the economic substance of risk transfer;
• the firm’s governance around SRT assessment (including sign-off procedures) and systems and controls relating to risk-transfer assessment and determination of SRT;
• SRT calculation policies and methodologies, including models used;
• the firm’s historical experience with relevant securitisation origination; and
• the use of third-party risk assessments (eg external ECAI ratings) and the relationship with internal assessments.

3.15

The information the PRA expects a firm to provide in a permission application includes the following:

1. (a) details of the firm’s governance processes for SRT, including details of any relevant committees and the seniority and expertise of key persons involved in sign-off;
2. (b) a copy of the firm’s SRT policy, including details of the SRT calculation policies, methodologies and any models used to assess risk transfer (this should set out how the firm ensures it only takes capital relief in proportion to the amount of risk transferred on any given transaction);
3. (c) a statement of how all relevant risks are incorporated in the SRT calculations and how the full economic substance of transactions is taken into consideration;
4. (d) details of the firm’s systems and controls regarding risk transfer in securitisations;
5. (e) a copy of the firm’s capital allocation strategy;
6. (f) details of any securitised assets that have come back on the firm’s balance sheet and the reason why; and
7. (g) details of reliance on ECAIs in determining SRT.

3.16

The PRA will apply two materiality limits to the proportion of RWEA reduction that can be taken under any permission covering multiple transactions:

1. (a) transaction level limit – any transaction that would in principle be within the scope of the permission, but that resulted in an RWEA reduction exceeding 1% of the firm’s credit risk related RWEAs, as at the date of the firm’s most recent regulatory return, will fall outside the scope of a multiple transaction permission and will require a separate permission or require notification (if the transaction would satisfy option 1 or 2); and
2. (b) aggregate limit – once the aggregate RWEA reduction on all SRT transactions executed within the scope of a permission exceeds 5% of the firm’s credit risk-related RWEAs as at the date of the firm’s most recent regulatory return, no additional transactions may be executed within scope of the permission. In such circumstances, a firm should take one of the following actions:
   
   1. (i) apply to renew the multiple transaction permission;
   2. (ii) apply for a new permission covering the specific transactions exceeding the RWEA limit; or
   3. (iii) notify the PRA of the transaction, following the SRT notification procedure (if the transactions would satisfy option 1 or 2).

3.17

Multiple transaction permissions will be granted for a period of one year. The PRA’s review of permission renewal will focus on changes to the firm’s SRT policies and methodologies since the previous review.

3.18

Permissions relating to individual transactions need not be granted prior to the execution of a transaction. The PRA does not intend to specify the timeframe in which a firm should submit an individual transaction permission application, but firms should note that capital relief from a specific transaction will not be available until a firm has obtained permission covering the SRT assessment and capital treatment (unless the transaction is being notified under option 1 or 2, or falls within scope of a multiple transaction permission).

3.19

The information the PRA expects to receive in an individual transaction permission includes the items set out in paragraph 3.8 points (d) to (p), and paragraph 3.15 points (a) to (c).

3.20

The PRA may grant an individual permission for the full duration of a transaction, or may impose a shorter time limit on the permission. Where a firm seeks to take capital relief on a transaction beyond the expiry date of the relevant permission, the permission will require renewal prior to expiry.

3.21

As SRT should be met on a continuing basis, permissions will typically include a requirement to notify the PRA of changes in circumstances from those under which the permission was granted. Any reduction in credit risk transfer subsequent to the permission being granted will require the firm to make a commensurate reduction in the extent of RWEA reduction that is recognised. If a firm does not effect a commensurate reduction in the RWEA relief in such circumstances, the PRA may revoke the relevant permission.

(CRR Articles 243, 244 and 337)