Banking (prudential standard) determination No. 11 of 2012 Prudential Standard APS 120 Securitisation (Cth)
Banking (prudential standard) determination No. 11 of 2012
Prudential Standard APS 120 Securitisation
Banking Act 1959
I, John Francis Laker, delegate of APRA:
(a) under subsection 11AF(3) of the Banking Act 1959 (the Act) REVOKE Banking (prudential standard) determination No. 7 of 2011 including Prudential Standard APS 120 Securitisation made under that Determination; and
(b) under subsection 11AF(1) of the Act DETERMINE Prudential Standard APS 120 Securitisation in the form set out in the attached Schedule, which applies to ADIs and authorised NOHCs to the extent provided in paragraphs 2 to 4 of the prudential standard.
This instrument takes effect on 1 January 2013.
Dated 29 November 2012
[Signed]
John Francis Laker
Chair
Interpretation
In this instrument:
ADI is short for authorised deposit-taking institution which has the meaning given in section 5 of the Act.
APRA means the Australian Prudential Regulation Authority.
authorised NOHC has the meaning given in section 5 of the Act.
Schedule
Prudential Standard APS 120 Securitisation comprises the 51 pages commencing on the following page.
Prudential Standard APS 120
Securitisation
Objective and key requirements of this Prudential Standard
This Prudential Standard requires authorised deposit-taking institutions to adopt prudent practices in managing the risks associated with securitisation and to ensure that sufficient regulatory capital is held against the associated credit risk.
The key requirements of this Prudential Standard are that an authorised deposit-taking institution must:
calculate regulatory capital by applying a standardised or internal ratings-based approach, depending on the approach it takes to general credit risk;
not provide implicit support to a securitisation;
stand clearly separate from a securitisation, with the extent of the institution's obligations to the securitisation set out in legal documentation; and
ensure that there is clear disclosure that its involvement in a securitisation does not extend beyond any specific undertakings to which it has formally committed itself.
Table of contents
Authority
Application
Interpretation
Scope
Definitions
Key principles
Significant credit risk transfer
Board and senior management responsibilities
Self-assessment
Implicit support and other risks
Attachments
Attachment A - Disclosure and separation requirements
Disclosure
Separation requirements between an ADI and SPV
Requirements for an SPV
Attachment B - General capital adequacy requirements
Operational requirements for regulatory capital relief
Maturity mismatches in synthetic securitisations
Operational requirements for the use of external credit assessments
Information on underlying collateral necessary to permit exposures to be risk-weighted at less than 1250 per cent
Calculation of risk-weighted assets and regulatory capital for securitisation exposures
Treatment of credit risk mitigation for securitisation exposures
Spread accounts and similar surplus income arrangements
Maximum capital amount
Shared collateral
Redraws and other additional exposures funded by the ADI
Holdings of subordinated tranche(s) of securitisations originated by another entity
Attachment C - Standardised approach
Risk-weights
Exceptions to the general treatment of unrated securitisation exposures
Treatment of most senior unrated securitisation exposures
Treatment of exposures in a second loss, or better, position in an asset-backed commercial paper securitisation
Treatment of unrated eligible facilities
Treatment of eligible servicer cash advance
Treatment of credit risk mitigation for securitisation exposures
APRA’s discretion where capital requirement uncertain
Attachment D — Internal ratings-based approach
Hierarchy of IRB approaches
Gain on sale
Ratings-based approach
Inferred ratings
Internal assessment approach
Mapping of ratings grades for Standard & Poor’s, Moody’s and Fitch
Supervisory formula
Capital charge under the supervisory formula
Eligible facilities
Eligible servicer cash advance
Treatment of credit risk mitigation for securitisation exposures
APRA’s discretion where capital requirement uncertain
Attachment E — Facilities and services
Eligible facilities
Underwriting facilities
Funding facilities
Derivative transactions
Eligible servicer cash advance facilities
Lending to investors
Services
Cash collateral arrangements
Representations and warranties
Attachment F — Acquisition of exposures out of a pool and acquisition of securities by originating ADIs
Acquisition of exposures out of a pool held by an SPV by an originating ADI
Acquisition by an originating ADI of securities issued by the SPV
Attachment G — Revolving structures and early amortisation clauses
General
Calculation of risk-weighted asset amounts and regulatory capital
Calculation of credit conversion factors for controlled and non-controlled early amortisation features
Authority
This Prudential Standard is made under section 11AF of the Banking Act 1959 (the Banking Act).
Application
An authorised deposit-taking institution (ADI), other than a foreign ADI or a purchased payment facility provider, must comply with all of the provisions of this Prudential Standard. A foreign ADI must comply with the provisions in this Prudential Standard relating to disclosure and separation (including paragraphs 13 to 16 inclusive, and Attachment A), self assessment (paragraph 23) and Board of directors (Board) and senior management responsibilities (paragraph 22), in relation to its securitisation business in Australia.
A reference to an ADI in this Prudential Standard, unless otherwise indicated, is a reference to:
(a)an ADI on a Level 1 basis; and
(b)a group of which an ADI is a member on a Level 2 basis.
If an ADI to which this Prudential Standard applies is:
(a)the holding company for a group, the ADI must ensure that the requirements in this Prudential Standard are met on a Level 2 basis, where applicable; or
(b)a subsidiary of an authorised non-operating holding company (authorised NOHC), the authorised NOHC must ensure that the requirements in this Prudential Standard are met on a Level 2 basis, where applicable.
Interpretation
Terms that are defined in Prudential Standard APS 001 Definitions appear in bold the first time they are used in this Prudential Standard.
Scope
Except where otherwise provided, this Prudential Standard applies to all roles undertaken by, and investments of, an ADI in a securitisation. This includes, but is not limited to, where the ADI is an originating ADI or provides a facility in relation to a securitisation. This Prudential Standard also applies to securitisations where the ADI, either itself or by using a third party, originates exposures directly into a special purpose vehicle (SPV), without those exposures having appeared on the ADI’s balance sheet (indirect origination).
An ADI must apply this Prudential Standard to securitisation exposures in its banking book. Securitisation exposures that are held in an ADI’s trading book are subject to the requirements of Prudential Standard APS 116 Capital Adequacy: Market Risk (APS 116) for capital purposes[1], except that securitisation exposures required to be risk-weighted at 1250 per cent if they were held in an ADI’s banking book must be risk-weighted at 1250 per cent if they are held in the trading book. Securitisation exposures required to be deducted under paragraph 29 of Attachment B if they were held in an ADI’s banking book must also be deducted if they are held in the trading book. Where relevant, securitisation exposures that are held in an ADI’s banking book are also subject to the requirements of Prudential Standard APS 117 Capital Adequacy: Interest Rate Risk in the Banking Book (Advanced ADIs).
[1] An ADI’s securitisation exposures may be allocated to its banking or trading book according to the ADI’s trading book policy statement (refer to Attachment A of APS 116).
This Prudential Standard applies to traditional securitisations, synthetic securitisations and securitisations that have features of both. APRA may determine, in writing, that this Prudential Standard applies to a particular transaction or structure as if it were a securitisation if APRA considers that it has similar features to a securitisation and gives rise to similar prudential risks.
A covered bond (as defined in the Banking Act) is not a securitisation for the purposes of this Prudential Standard.
An ADI must notify APRA prior to entering into a funding arrangement (other than a covered bond issued consistent with Division 3A of Part II of the Banking Act or a securitisation that complies with all the provisions of this Prudential Standard including the operational requirements for regulatory capital relief in Attachment B to this standard and for which the ADI is seeking capital relief) that involves providing an interest in, or over, assets originated by the ADI, to the funding provider. The ADI must assess the proposal in detail and must establish, to APRA's reasonable satisfaction, that the arrangement:
(a)complies with this Prudential Standard and that the ADI is seeking to treat it as an on-balance sheet arrangement; or
(b)does not give the funding provider, even in limited or unlikely circumstances, effective recourse to both the ADI and the pool of assets for repayment (unless it is a covered bond issued or originated by an overseas Level 2 entity in accordance with the requirements of its regulator); or
(c)does not reduce the protection available to depositors of the ADI on either a going-concern or default basis.
Where an ADI wishes to enter into an arrangement described in paragraph 10 and cannot meet any of the tests in subparagraphs 10(a) to 10(c), it must apply to APRA for approval to enter into the arrangement. APRA may, if there are exceptional circumstances, approve the arrangement and if it does so, may impose an appropriate regulatory capital treatment for the transaction.
Definitions
The following definitions are used in this Prudential Standard:
(a)asset-backed commercial paper (ABCP) securitisation - a securitisation where the securities issued are predominantly commercial paper with an original maturity of one year or less;
(b)basis swap - an interest rate swap aimed at limiting basis risk. For the purposes of this Prudential Standard, a basis swap includes a payment stream on one leg of the swap based on an observable market rate or index, and a payment stream on the other leg based on rates set by a party to the swap;
(c)clean-up call - in the case of a traditional securitisation, an option that permits the originating ADI to call the exposures in a pool before they have been fully repaid for the purpose of winding up the securitisation. This is often accomplished by repurchasing the remaining exposures of a pool once the outstanding balance of the pool has fallen below a specified level. In the case of a synthetic securitisation, a clean-up call may take the form of a clause that extinguishes the credit protection;
(d)credit enhancement - an arrangement in which an ADI holds a securitisation exposure that is able to absorb losses in the pool and thereby provides credit protection to investors or other parties to the securitisation. A first loss credit enhancement is available to absorb losses in the first instance. A second loss credit enhancement is available to absorb losses after significant first loss credit enhancements have been exhausted;
(e)credit rating grades - grades of credit ratings to which external credit assessment institution (ECAI) ratings are mapped, and that correspond to relevant risk weights;
(f)early amortisation clause - a contractual clause that, when triggered, will result in security holders in a securitisation being paid out, in full or in part, prior to the originally stated maturity of the issued securities. Such clauses are generally included in the securitisation of revolving exposures;
(g)eligible facility - has the meaning in Attachment E;
(h)eligible servicer cash advance - has the meaning in Attachment E;
(i)facility - a facility provided by an ADI to a securitisation, including but not limited to:
(i) a liquidity facility;
(ii) a funding facility;
(iii) an underwriting facility; and
(iv) a derivative transaction with an SPV;
(j)funding facility - a facility provided by an ADI to an SPV for the purchase of exposures for a pool;
(k)gain on sale - an increase in an ADI’s equity capital or assets as a result of originating exposures into a securitisation, such as recognition of capitalised expected future margin or servicing income, a profit on the sale of exposures or purchase of a residual income unit;
(l)implicit support - has the meaning in paragraph 16;
(m)liquidity facility - a facility provided by an ADI to an SPV for the primary purpose of funding any timing mismatches between receipts of funds on underlying exposures and payments on securities issued by the SPV, or to cover the inability of the SPV to roll-over securities due to market disruption;
(n)managing ADI - an ADI that manages a securitisation. This may include undertaking responsibility for the day-to-day administration of the issuing SPV, allocation of collections, calculation of payments and preparation of investor reports. A managing ADI may also manage swaps, liquidity and other facilities and events such as the issuance, refinancing or calling of securities;
(o)originating ADI - with respect to a securitisation, an ADI that:
(i) directly or indirectly originates underlying exposures in the pool;
(ii) is the managing ADI for the securitisation; or
(iii) provides a facility (other than derivatives) to an ABCP securitisation;
(p)pool - the underlying exposure or exposures that are securitised by way of assignment or the transfer of rights and obligations to an SPV. The pool may consist of, but need not be limited to, loans, bonds or equities;
(q)resecuritisation exposure - a resecuritisation exposure is a securitisation exposure in which the risk associated with an 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 resecuritisation exposures is a resecuritisation exposure;
(r)revolving exposures - exposures arising from revolving (that is, redrawable) facilities, other than exposures in the nature of redrawable home loans where the amounts likely to be redrawn in any collection period are expected to be immaterial relative to the size of the pool;
(s)securitisation - a structure where the cash flow from a pool is used to service obligations to at least two different tranches or classes of creditors (typically holders of debt securities), with each class or tranche reflecting a different degree of credit risk (i.e. one class of creditors is entitled to receive payments from the pool before another class of creditors). A warehouse SPV is a securitisation even if it does not have at least two different tranches of creditors or securities;
(t)securitisation exposures - on-balance sheet and off-balance sheet risk positions held by an ADI arising from a securitisation including, but not limited to:
(i) investments by the ADI in securities issued by an SPV, including retention of a subordinated tranche of securities issued by an SPV;
(ii) other credit enhancements, such as guarantees provided by the ADI;
(iii) drawn and undrawn funding, underwriting, liquidity and other facilities provided by an ADI to a securitisation; and
(iv) exposures arising from swaps and other derivative transactions with an SPV;
(u)service provider - an ADI that provides a service to an SPV, including as manager or servicing ADI, or by providing a trustee or security trustee. The provision of a facility by an ADI does not, of itself, constitute the provision of a service;
(v)servicing ADI - a service provider that administers a pool for an SPV. This may include calculating account balances in relation to securitised loans as well as preparing borrowers’ statements, collecting payments and calculating write-offs in relation to such loans;
(w)SPV - a financing vehicle that typically purchases and holds the pool for the purposes of a securitisation. The SPV’s payment for the pool is typically funded by debt, including through the issue of units or securities by the SPV;
(x)synthetic securitisation - a securitisation whereby only the credit risk, or part of the credit risk, of a pool is transferred to a third party, which need not necessarily be an SPV[2];
[2] The transfer of credit risk can be undertaken through the use of funded (e.g. credit linked notes), or unfunded (e.g. credit default swaps) credit derivatives or guarantees.
(y)traditional securitisation - a securitisation where the pool is transferred or assigned to, and held by, an SPV;
(z)underwriting facility - a facility under which an ADI agrees to buy securities from the SPV to facilitate their distribution to the market; and
(aa)warehouse SPV - an SPV that accumulates exposures until a sufficiently large pool is available for issuance of securities to the market in a securitisation.
Key principles
An ADI must deal with an SPV and its investors on an arm’s-length basis and on market terms and conditions.
The nature and limitations of an ADI’s involvement in a securitisation must be clearly disclosed to investors (refer to Attachment A).
An ADI’s involvement in a securitisation must be set out in legal documentation and be limited as to time and amount.
An ADI must not provide, or knowingly create or encourage a perception that it will provide, support to a securitisation that is in excess of the ADI’s explicit contractual obligations. To do so will be to provide implicit support.
An originating ADI of a traditional securitisation may exclude the underlying exposures in the pool from exposures used in the calculation of its regulatory capital for credit risk under Prudential Standard APS 112 Capital Adequacy: Standardised Approach to Credit Risk (APS 112) or Prudential Standard APS 113 Capital Adequacy: Internal Ratings-based Approach to Credit Risk (APS 113) and, where applicable, expected losses, if the credit risk associated with that pool has been transferred to third parties and the transfer complies with the relevant requirements in Attachment B.
An originating ADI may recognise certain credit risk mitigation (CRM) techniques in a synthetic securitisation if the synthetic securitisation complies with the relevant requirements in Attachment B.
An ADI must hold regulatory capital for credit risk (as detailed in Attachments C, D and G of this Prudential Standard) against its securitisation exposures.
An ADI may provide facilities and services to a securitisation, provided this does not result in implicit support. An ADI must hold regulatory capital for credit risk (as detailed in Attachments C and D) against a securitisation exposure arising from a facility, and the facility must comply with Attachment E.
Significant credit risk transfer
In order for an originating ADI to exclude the underlying exposures in the pool from the exposures used in calculation of its regulatory capital for credit risk, calculated in accordance with APS 112 or APS 113, the ADI must ensure that significant credit risk associated with the exposures has been transferred to third parties.
Board and senior management responsibilities
The Board and senior management of an ADI[3] must establish policies and procedures relating to its securitisation business and must ensure that these policies and procedures are implemented. These policies and procedures must include:
[3] In relation to a foreign ADI, the responsibilities in paragraph 22 of this Prudential Standard are to be fulfilled by the senior officer outside Australia nominated by the ADI under paragraph 37 of Prudential Standard CPS 510: Governance (CPS 510), and the senior manager in Australia referred to in paragraph 38 of CPS 510.
(a)appropriate risk management systems to identify, measure, monitor and manage the risks arising from the ADI’s involvement in securitisation;
(b)how the ADI will monitor the effects of securitisation on its risk profile, including credit quality, and how it has aligned its risk management practices; and
(c)how the ADI will ensure that it is not providing implicit support for a securitisation.
Self-assessment
An ADI must assess, in writing, each securitisation in which it participates and the assessment must demonstrate compliance with this Prudential Standard, including the applicable credit risk regulatory capital treatment. The ADI must provide to APRA, upon request, a copy of that assessment.
Implicit support and other risks
If APRA considers that an ADI is providing implicit support to a securitisation, or otherwise is not complying or is unable to comply with this Prudential Standard, including the operational requirements for regulatory capital relief contained in Attachment B to this standard, APRA may, in writing, increase the ADI’s capital requirement by an amount specified by APRA. The amount will be commensurate with the risks arising from the provision of the implicit support, or other breach of this Prudential Standard. Where an ADI provides implicit support to a securitisation, APRA may increase the capital charge on all of the ADI’s securitisation business. Capital requirements will not exceed the amount of regulatory capital that the ADI would be required to hold in respect of credit risk under APS 112 or APS 113, as appropriate, against all of its securitisation business based on:
(a)the relevant pools, as if the exposures in the pools were held by the ADI. In calculating the regulatory capital requirement, the ADI must still have regard to the actual transaction structures in place. In particular, an ADI that uses the standardised approach to credit risk must consider whether the interposed structures would prevent the assignment of a risk-weight of less than 100 per cent to claims secured by residential mortgages under Attachment D to APS 112; or
(b)the full value of all securities issued by the relevant SPV(s), as if the securities were held by the ADI.
If APRA considers that an ADI is providing implicit support to a securitisation, APRA may, in writing, require the ADI to disclose publicly the implicit support.
If APRA considers that the risks arising out of securitisation are not adequately managed by holding additional regulatory capital, APRA may, in writing, impose limits (both quantitative and qualitative) on the extent to which additional exposures may be securitised by an ADI or additional securitisation exposures (including those arising from providing facilities or services) are acquired by an ADI.
Attachment A
Disclosure and separation requirements
Disclosure
An originating ADI must ensure that there is clear and prominent disclosure to investors of the nature and limitations of the ADI’s obligations arising from its involvement in a securitisation. Documentation or marketing of a securitisation must not give the impression that recourse to the ADI would extend beyond any specific undertakings to which the ADI has formally committed itself.
It must be clearly disclosed that an investment in the securitisation does not represent a deposit with or other liability of the originating ADI.
Disclosures in documents inviting investment in a securitisation must be presented prominently at the beginning of the document.
Separation requirements between an ADI and SPV
An SPV must be clearly separate from any ADI involved in the securitisation and there must be clear limitations governing the extent of an ADI’s involvement. Any undertakings given by an ADI to an SPV must be expressed clearly in the legal documentation relating to the securitisation and must be fixed as to time and amount.
Any undertakings given by an ADI to an SPV or investors must be subject to the ADI’s normal approval and control processes.
An originating ADI must not:
(a)own or hold a material direct, indirect or beneficial interest[4] in any share capital, including ordinary shares or preference shares, of an SPV where the SPV is a corporation;
[4] For purposes of paragraph 6 of this Attachment, a share created for the purpose of securing a residual interest distribution, such as an entitlement arising from a spread account or similar surplus income arrangement that complies with the conditions in Attachment B or an investment in securities that complies with Attachment F, is not considered a beneficial interest.
(b)own or hold a material direct, indirect or beneficial interest in any share capital in a trustee where the SPV is a trust;
(c)include, permit or acquiesce to the inclusion of the word ‘bank’, ‘building society’, ‘credit union’, ‘authorised deposit-taking institution’ or ‘ADI’ in the name of an SPV;
(d)allow any of the ADI’s directors, officers or employees to sit on the Board[5] of an SPV unless the Board has at least four members. The ADI, however, may be represented by one director on a Board of four to six directors and by no more than two directors on a Board of seven or more directors;
[5] An SPV may be a company or a trust with a corporate trustee. References to the directors and Board of an SPV in this Prudential Standard apply equally to the directors and the Board of the corporate trustee of an SPV that is a trust.
(e)act, or allow any of its directors, officers or employees to act in any circumstances as a trustee of an SPV, or in any similar role. The trustee must not be part of the group, as defined in Australian accounting standards, to which the ADI belongs; or
(f)be liable for the obligations and liabilities of the SPV,[6] in particular in the event the SPV incurs losses.
[6] This does not apply to the limited circumstances explicitly permitted by this Prudential Standard.
APRA may, at its discretion, require an ADI to seek a legal opinion on any of the separation requirements from an independent legal counsel chosen by APRA, at the expense of the ADI.
Requirements for an SPV
In a securitisation, an SPV must satisfy the following criteria:
(a)the SPV must be a corporation, trust or other entity organised for a specific purpose;
(b)the purpose of the SPV must be clearly defined and the activities of the SPV must be limited to those necessary to accomplish that purpose; and
(c)the SPV must be financially and operationally independent of the originating ADI.
Attachment B
General capital adequacy requirements
As securitisations may be structured in many different ways, an ADI’s regulatory capital treatment of a securitisation exposure must be calculated on the basis of the exposure’s economic substance rather than its legal form.
Operational requirements for regulatory capital relief
An originating ADI may, in calculating its regulatory capital for credit risk under APS 112 or APS 113, exclude exposures in a pool that would otherwise be included in the calculation of its risk-weighted assets and, where applicable, expected loss, if, at both the time of risk transfer and afterwards:
(a)the exposures in the pool are legally isolated from the ADI in such a way that the exposures are put beyond the reach of the ADI and its creditors, including in bankruptcy, winding up and receivership. The originating ADI must not:
(i) be obliged to repurchase the exposures out of the pool held by the SPV, except in accordance with Attachment F;
(ii) be obliged to retain the credit risk of the exposures; or
(iii) once the exposures have been transferred, bear recurring costs from the securitisation (unless otherwise permitted under this Prudential Standard);
(b)the issued securities are not obligations of the ADI and therefore investors who purchase the securities only have claim to the relevant pool and any applicable facilities of the SPV;
(c)the transferee is an SPV and the holders of the securities in that SPV have the right to pledge or exchange them without restriction, other than restrictions necessary for compliance with legal requirements;
(d)significant credit risk associated with the exposures has been transferred from the ADI to third parties (in accordance with paragraph 21);
(e)representations and warranties provided by the ADI comply with Attachments E and F, and clean-up calls comply with Attachment F;
(f)the ADI does not and is not required to:
(i) systematically alter the exposures such that a pool’s weighted-average credit quality is improved;
(ii) increase a retained first loss position or credit enhancement (except to the extent necessary to cover new exposures added to the pool); or
(iii) increase the yield payable in response to a deterioration in the credit quality of a pool or of the originator to parties such as investors and third-party providers of credit enhancements;
(g)where revolving exposures are transferred and the ADI retains an interest in those exposures, the conditions in paragraph 1 of Attachment G are satisfied; and
(h)the document of transfer specifies that, if cash flows relating to an exposure in a pool are rescheduled or renegotiated, the SPV will be subject to the rescheduled or renegotiated terms.
An originating ADI may recognise the use of CRM techniques (i.e. credit derivatives, guarantees or eligible collateral) in a synthetic securitisation for the purposes of calculating its regulatory capital for credit risk if, at both the time of risk transfer and afterwards:
(a)the transfer of credit risk through the use of CRM techniques complies with the eligibility and other requirements:
(i) for credit derivatives, refer to Attachment I to APS 112[7];
[7] For this purpose, SPVs are not recognised as eligible credit protection providers.
(ii) for guarantees, refer to Attachment G to APS 112[8]; and
[8] For this purpose, SPVs are not recognised as eligible guarantors.
(iii) for eligible collateral, refer to Attachment H to APS 112[9];
[9] For this purpose, eligible collateral pledged by SPVs is recognised.
(b)the instruments used to transfer credit risk do not contain terms or conditions that limit the amount of credit risk transferred, such as clauses that:
(i) materially limit the credit protection or credit risk transference (e.g. materiality thresholds below which credit protection is deemed not to be provided even if a credit event occurs or those that allow for the termination of the protection due to a deterioration in the credit quality of the pool);
(ii) require the ADI to alter the composition of a pool to improve the weighted-average credit quality of that pool;
(iii) increase the ADI's cost of credit protection in response to a deterioration in the credit quality of a pool;
(iv) increase the yield payable to investors and third party providers of credit enhancements in response to a deterioration in the credit quality of a pool; or
(v) provide for an increase in a retained first loss position or credit enhancement provided by the ADI after the inception of the securitisation;
(c)significant credit risk associated with the securitised exposures has been transferred to third parties;
(d)representations and warranties provided by the ADI comply with Attachments E and F, and clean-up calls comply with Attachment F; and
(e)where revolving exposures are transferred and the ADI retains an interest in those exposures, the conditions in paragraph 1 of Attachment G are satisfied.
An originating ADI must obtain written advice from legal counsel that:
(a)in the case of a traditional securitisation, the transferred exposures in the pool are legally isolated from the ADI in such a way that the exposures are put beyond the reach of the ADI and its creditors, including in the case of the appointment of a statutory manager (or its equivalent), or its winding up and receivership; and
(b)all agreements, deeds and other legal documentation relating to the securitisation are enforceable in all relevant jurisdictions.
APRA may, at its discretion, require an ADI to seek a legal opinion on any other operational requirement for capital relief from an independent legal counsel chosen by APRA, at the expense of the ADI.
Maturity mismatches in synthetic securitisations
The effective maturity of the tranches of securities issued in a synthetic securitisation may differ from that of the pool, causing a maturity mismatch to occur. To assess whether a maturity mismatch has occurred, the maturity of a pool must be compared with the maturity of the tranches of the securitisation. For this purpose, the exposure in a pool with the longest maturity must be taken as the maturity of that pool.
A maturity mismatch exists where the residual maturity of the securitisation is shorter than the residual maturity of the pool[10]. In this case, full capital relief may not be recognised even if the synthetic securitisation otherwise complies with this Attachment. Instead, the capital requirement must be calculated in accordance with:
[10] A maturity mismatch may also occur if a synthetic securitisation incorporates a call (other than a clean-up call) that effectively terminates the transaction and the purchased credit protection on a specific date.
(a)for credit derivatives, Attachment I to APS 112;
(b)for guarantees, Attachment G to APS 112; and
(c)for eligible collateral, Attachment H to APS 112.
Operational requirements for the use of external credit assessments
For the purposes of calculating its regulatory capital for credit risk under this Prudential Standard (and, in particular, under Attachments C and D) for the securitisation exposures held, an ADI may only use an external credit assessment that takes into account all amounts, both principal and interest, owed to it.
An ADI may only use external credit assessments of ECAIs that are published in a form that is accessible to Australian wholesale clients[11] and foreign entities and that are included in the ECAI's transition matrix[12]. An eligible credit assessment, procedures, methodologies, assumptions, and the key elements underlining the assessments must be available to Australian wholesale clients and foreign entities, on a non-selective basis and free of charge. Also, loss and cash-flow analysis as well as sensitivity of ratings to changes in the underlying ratings assumptions must be available to Australian wholesale clients and foreign entities.
[11] In this Attachment, ‘wholesale clients’ has the meaning given by section 761A of the Corporations Act.
[12] A transition matrix is a table of probabilities representing the likelihood, over a given time horizon, of a rating grade of a securitisation exposure migrating to other rating grades, remaining the same or experiencing default.
An ADI must apply the external credit assessments of an ECAI consistently across a given type of securitisation exposure. Where ECAIs assess the credit risk of the same securitisation exposure differently, Attachment F of APS 112 will apply. An ADI must not use the external credit assessments issued by one ECAI for some tranches and those of another ECAI for other tranches within the same securitisation.
An ADI must not use any external credit risk assessment for risk weighting purposes where the assessment is at least partly based on unfunded support (e.g. liquidity facility or credit enhancement) provided by the ADI. In such a scenario, the ADI:
(a)must continue to hold capital against the other securitisation exposures it provides (e.g. against the liquidity facility and/or credit enhancement);
(b)must ensure the capital charge for such exposures held in the trading book is no less than the amount required under the banking book treatment; and
(c)may recognise any overlap in its exposures consistent with paragraph 16 of this Attachment.
Information on underlying collateral necessary to permit exposures to be risk-weighted at less than 1250 per cent
An ADI must risk-weight an exposure at 1250 per cent, whether in the trading or banking book (and must not use the provisions in respect of the maximum capital amount in paragraph 25 of this Attachment), unless it performs due diligence specified, which requires it to:
(a)on an ongoing basis, have a comprehensive understanding of the risk characteristics of its individual securitisation exposures, whether on- balance sheet or off-balance sheet, as well as the pools underlying its securitisation exposures;
(b)have access to and periodically review detailed performance information on the underlying pools in a timely manner;
(c)for resecuritisations, have access to and periodically review information not only on the underlying securitisation tranches but also on the risk characteristics and performance of the pools underlying the securitisation tranches; and
(d)have a comprehensive understanding of all structural features of a securitisation transaction that may have a material impact on the ADI’s exposures to the transaction.
Calculation of risk-weighted assets and regulatory capital for securitisation exposures
As detailed in Attachments C and D, for an on-balance sheet securitisation exposure (including the drawn amount of a facility), when calculating regulatory capital for credit risk, the risk-weighted asset amount of that exposure must be calculated by multiplying the exposure value[13] by the relevant risk-weight.
[13] The exposure value of a securitisation exposure is its on-balance sheet value (i.e. net of specific provisions). The exposure value of a securitisation exposure arising from a derivative instrument will be determined by using the credit equivalent amount of the derivative calculated using the current exposure method (mark-to-market), i.e. replacement cost plus potential future exposure (refer to Attachment B to APS 112).
To calculate the risk-weighted asset amount for an off-balance sheet securitisation exposure (including the undrawn amount of a facility), an ADI must apply a credit conversion factor (CCF) to the securitisation exposure and risk-weight the resultant credit equivalent amount by the relevant risk-weight. Unless otherwise stated in this Prudential Standard, a CCF of 100 per cent must be used.
Unless otherwise stated in this Prudential Standard, regulatory adjustments to an ADI’s capital must be made to Common Equity Tier 1 Capital (refer to Prudential Standard APS 111 Capital Adequacy: Measurement of Capital (APS 111)). Regulatory adjustments to capital may be calculated net of any specific provisions raised against the relevant securitisation exposure.
Overlapping securitisation exposures may occur where an ADI provides several types of facilities (e.g. a liquidity facility and a credit enhancement or a pool-specific and program-wide facility). In some cases, the drawdown on one facility may preclude (in part) a drawdown on another facility. Where an ADI has two or more overlapping securitisation exposures in a securitisation, it may, to the extent that these positions overlap, include in its calculation of risk-weighted assets only that securitisation exposure, or portion of securitisation exposure, that produces the higher amount of regulatory capital. Such overlap may also be recognised between specific risk charges for exposures in the trading book and capital charges for exposures in the banking book provided the ADI can calculate and compare, in terms of paragraph 11(b) of this Attachment, the capital charges for the relevant exposures.
Treatment of credit risk mitigation for securitisation exposures
Where the CRM is provided directly to an SPV by an eligible guarantor (as defined in Attachment G to APS 112) other than the ADI, and this is reflected in the external credit assessment assigned to a securitisation exposure, the risk-weight associated with that external credit assessment may be used.
Where the CRM is provided directly to an SPV by a guarantor that is not recognised as an eligible guarantor (as defined in Attachment G to APS 112), and the CRM is reflected in the external credit assessment assigned to a securitisation exposure, the guaranteed exposure must be treated as unrated.
Where the CRM is applied directly to a specific securitisation exposure (e.g. a specified residential mortgage-backed securities tranche guaranteed by a highly rated third party) within a given structure, the ADI must treat the exposure as unrated and then use the CRM treatment detailed in APS 112 or APS 113 as appropriate.
Spread accounts and similar surplus income arrangements
Where an originating ADI transfers a pool to an SPV, it may be entitled to future surplus income generated by a securitisation. These arrangements may, among others, take the form of a deferred purchase price, excess servicing income, residual interest, excess spread[14] or similar arrangements and may result in a gain on sale reported in the ADI’s accounts. An ADI must not recognise such future income until irrevocably received.
[14] Excess spread is defined as finance charge collections and other fee income received by the SPV net of costs, interest and expenses.
An originating ADI must deduct from its Common Equity Tier 1 Capital (refer to APS 111) any gain on sale, including expected future income from a securitisation exposure that it has reported as an on-balance sheet asset or profit, until irrevocably received. Where an originating ADI provides funds to establish a spread, reserve or similar account, those amounts must be deducted from its Common Equity Tier 1 Capital until the funds are irrevocably paid to the ADI.
Where an originating ADI transfers exposures to an SPV below their book value (e.g. pursuant to an over-collateralisation agreement or by sale at a discounted price), the difference between the book value and the amount received by the ADI must be deducted from its Common Equity Tier 1 Capital unless it is written off in the ADI’s profit or loss (and capital) accounts.
Where an ADI contributes to the start-up costs of a securitisation and these costs have been capitalised (rather than written off in the ADI’s profit and loss account), they must be deducted from the ADI’s Common Equity Tier 1 Capital as capitalised expenses. The ADI must also ensure that the amounts involved are in line with normal market expenses for similar securitisations.
Where an originating ADI provides a basis swap to a securitisation, a positive mark-to-market value of this swap represents the present value of certain future excess cash-flows generated by the asset pool, which is akin to accessing surplus income. If a required rate arrangement was used instead of a basis swap, this value would emerge over time as surplus income. Consistent with the treatment of surplus income, an ADI must therefore deduct from its Common Equity Tier 1 Capital (refer to APS 111) any positive mark-to-market valuation that it has reported as an on-balance sheet asset or profit until irrevocably received.
Maximum capital amount
Where a securitisation structure complies with all the requirements of this Prudential Standard, an originating ADI may, for calculating the regulatory capital requirement, elect to treat the pool as if it is held on its books and risk-weight the exposures under APS 112 or APS 113, as appropriate, rather than as a securitisation under this Prudential Standard. In this case, only the underlying exposures are subject to the capital requirements and additional capital in respect of credit risk is not required for other facilities or exposures to the SPV that relate to the pool.
In calculating the regulatory capital requirement under APS 112 or APS 113 the ADI must still have regard to the actual transaction structures in place. In particular, an ADI that uses the standardised approach to credit risk must consider whether the interposed structures would prevent the assignment of a risk weight of less than 100 per cent to claims secured by residential mortgages under Attachment D of APS 112.
Shared collateral
Where an ADI retains an interest in collateral assigned to an SPV as a result of additional exposures to that collateral, such as an interest relating to arrangements to provide further advances to customers, these exposures of the ADI will not be eligible for a risk-weight of less than 100 per cent, pursuant to Attachment D of APS 112, unless a formal second mortgage arrangement is in place which meets the requirements of that Attachment.
Redraws and other additional exposures funded by the ADI
Where the SPV has committed to acquire the additional exposures from the ADI, the ADI will not be required to include any undrawn commitment to the customer in its risk-weighted assets in calculating its regulatory capital for credit risk, provided the SPV has a facility in place to finance the acquisition of the additional exposures (e.g. a redraw funding facility).
Holdings of subordinated tranche(s) of securitisations originated by another entity
An ADI must deduct an exposure from Common Equity Tier 1 Capital (refer to APS 111), whether held in the trading book or banking book, where that exposure is to a subordinated tranche(s) of a securitisation originated by an entity other than the ADI or an extended licensed entity (ELE) of the ADI. This paragraph does not apply where an ADI holds a subordinated tranche(s) in a warehouse SPV for which it has provided funding.
For the purposes of paragraph 29 of this Attachment, a subordinated tranche is any tranche of a securitisation that is exposed to the first 10 per cent of potential credit losses as a share of the initial capital structure, unless it is also the most senior tranche.
Attachment C
Standardised approach
An ADI that uses the standardised approach to credit risk under APS 112 must use this Attachment for calculating its regulatory capital for credit risk for securitisation exposures.
Risk-weights
As detailed in Attachment B, the risk-weighted asset amount of a securitisation or resecuritisation exposure must be calculated by multiplying the exposure value[15] or, in the case of an off-balance sheet exposure, the credit equivalent amount of the exposure, by the risk-weight associated with the exposure’s credit rating grade (refer to paragraphs 4 and 5 of this Attachment).
[15] The exposure value of a securitisation exposure is its on-balance sheet value (i.e. net of specific provisions). The exposure value of a securitisation exposure arising from a derivative instrument will be determined by using the credit equivalent amount of the derivative calculated using the current exposure method (mark-to-market), i.e. replacement cost plus potential future exposure (refer to Attachment B to APS 112).
An ADI must deduct any gain on sale from its Common Equity Tier 1 Capital.
The long-term credit rating grades and corresponding risk-weights are in Table 1 below.
Table 1: Long-term credit rating grades and corresponding risk-weights
Credit rating grade 1 2 3 4 5, 6 and unrated Securitisation risk- weight 20% 50% 100% 350% 1250% Resecuritisation risk- weight 40% 100% 225% 650% 1250%
The short-term credit rating grades and corresponding risk-weights are in Table 2 below.
Table 2: Short-term credit rating grades and corresponding risk-weights
Credit rating grade 1 2 3 4 and unrated Securitisation risk- weight 20% 50% 100% 1250% Resecuritisation risk- weight 40% 100% 225% 1250%
Exceptions to the general treatment of unrated securitisation exposures
As detailed in paragraphs 4 and 5 of this Attachment, the general treatment of unrated securitisation exposures is to apply a risk-weight of 1250 per cent. Exceptions to this general treatment are as follows:
(a)the most senior exposure in a securitisation (refer to paragraphs 7 to 9 of this Attachment);
(b)for ABCP securitisations, an exposure that is in a second loss, or better, position (refer to paragraphs 10 and 11 of this Attachment);
(c)an eligible facility as detailed in Attachment E; or
(d)an eligible servicer cash advance as detailed in Attachment E.
Treatment of most senior unrated securitisation exposures
If the most senior exposure in a securitisation (e.g. the most senior tranche of securities issued by the SPV or an obligation under a facility that ranks ahead of the first tranche) is unrated, an ADI that holds such an exposure may calculate the risk-weight to be applied against the exposure by using the look-through approach.
In the look-through approach, the average risk-weight of the pool may be used as the risk-weight for the most senior securitisation exposure if an ADI is:
(a)at all times, aware of the composition of the pool; and
(b)able to calculate the relevant risk-weights (as calculated under APS 112) that are applicable to the underlying exposures in the pool.
When using the look-through approach, an ADI is not required to consider taxes and similar imposts, fees to service providers, interest rate swaps, currency swaps or eligible servicer cash advances as detailed in Attachment E in assessing whether an exposure is the most senior in a securitisation.
Treatment of exposures in a second loss, or better, position in an asset-backed commercial paper securitisation
An ADI is not required to risk-weight at 1250 per cent an unrated second loss position securitisation exposure in an ABCP securitisation where:
(a)the exposure is economically in a second loss or better position and the first loss position provides significant[16] credit enhancement to the second loss position;
[16] A first loss position is considered significant when it covers a multiple of historical losses or worst-case loss calculated by the use of models and simulation techniques.
(b)the second loss position will only be drawn upon when the first loss position has been completely exhausted;
(c)the associated credit risk is the equivalent of a credit rating grade of three or better; and
(d)the ADI holding the unrated securitisation exposure does not retain, acquire or otherwise provide the first loss position.
A securitisation exposure to which paragraph 10 of this Attachment applies may be risk-weighted at the greater of:
(a)100 per cent; or
(b)the highest relevant risk-weight (as assessed under APS 112) for any of the underlying individual exposures supported by the second loss facility.
Treatment of unrated eligible facilities
The credit equivalent amount of an undrawn eligible facility, other than an undrawn eligible servicer cash advance (refer to paragraph 14 of this Attachment), that meets the requirements of Attachment E must be calculated by applying a 50 per cent CCF to the notional amount of the eligible facility regardless of the maturity of the facility.
The risk-weight to be applied to the credit equivalent or drawn amount is the highest relevant risk-weight (as assessed under APS 112) for any of the underlying individual exposures covered by the eligible facility.
Treatment of eligible servicer cash advance
An ADI may apply a zero per cent CCF to an undrawn eligible servicer cash advance that meets the requirements of Attachment E.
Treatment of a securitisation exposure which is not an eligible facility
The credit equivalent amount of a securitisation exposure which is not an eligible facility, must be calculated by applying a 100 per cent CCF to the undrawn amount of the securitisation exposure regardless of the maturity of the securitisation exposure.
Treatment of credit risk mitigation for securitisation exposures
The risk-weight applied to a securitisation exposure that is subject to credit protection may be adjusted in accordance with:
(a)for credit derivatives, Attachment I to APS 112;
(b)for guarantees, Attachment G to APS 112; and
(c)for eligible collateral, Attachment H to APS 112.
Where an ADI provides protection to an unrated credit enhancement, it must hold regulatory capital in respect of the relevant credit risk as if it were directly holding the unrated credit enhancement.
APRA’s discretion where capital requirement uncertain
If the nature of a particular securitisation exposure is such that it is uncertain whether or how much regulatory capital is to be held in relation to it under this Attachment, APRA may, in writing, determine the amount of regulatory capital, or a method for calculating it, having regard to the nature of the exposure and the general approach taken to similar exposures under this Prudential Standard.
Mapping of ratings grades for Standard & Poor’s, Moody’s and Fitch
For the purposes of Table 1 of this Attachment, where the ECAI is Standard & Poor’s, Moody’s or Fitch, ratings are to be mapped as shown in Table 3 below.
Table 3: Recognised long-term ratings and equivalent credit rating grades
Credit rating grade
Standard & Poor’s Corporation[17]
Moody’s Investor Services[18]
Fitch Ratings [19]
1
AAA
AA+
AA
AA-
Aaa
Aa1
Aa2
Aa3
AAA
AA+
AA
AA-
2
A+
AA-
A1
A2
A3
A+
A
A-
3
BBB+
BBB
BBB-
Baa1
Baa2
Baa3
BBB+
BBB
BBB-
4
BB+
BB
BB-
Ba1
Ba2
Ba3
BB+
BB
BB-
5
B+
B
B-
B1
B2
B3
B+
B
B-
6
CCC+
CCC
CCC-
CC
C
D
Caa1
Caa2
Caa3
Ca
C
CCC+
CCC
CCC-
CC
C
D
[17] The credit ratings include structured finance ratings with the (sf) indicator.
[18] The credit ratings include structured finance ratings with the (sf) indicator.
[19] The credit ratings include structured finance ratings with the (sf) indicator.
For the purposes of Table 2 of this Attachment, where the ECAI is Standard & Poor’s, Moody’s or Fitch, ratings are to be mapped as shown in Table 4 below.
Table 4: Recognised short-term ratings and equivalent credit rating grades
Credit rating grade
Standard & Poor’s Corporation[20]
Moody’s Investor Services[21]
Fitch Ratings[22]
1
A-1
P-1
F-1
2
A-2
P-2
F-2
3
A-3
P-3
F-3
4
Others
Others
Others
[20] The credit ratings include structured finance ratings with the (sf) indicator.
[21] The credit ratings include structured finance ratings with the (sf) indicator.
[22] The credit ratings include structured finance ratings with the (sf) indicator.
Attachment D
Internal ratings-based approach
Unless otherwise agreed by APRA in writing, an ADI that has IRB approval to calculate regulatory capital for credit risk for the type of exposures in the pool must use this Attachment to calculate its regulatory capital for credit risk in respect of securitisation exposures.
Hierarchy of IRB approaches
Under the IRB approach, there is a hierarchy of approaches that an ADI must follow to calculate the regulatory capital for credit risk in respect of securitisation exposures, as follows:
(a)where a securitisation exposure is externally rated, or where an external rating can be inferred, the ADI must use the ratings-based approach as detailed in paragraphs 4 to 11 of this Attachment;
(b)for facilities (such as liquidity facilities and credit enhancements) that the ADI extends to:
(i) an ABCP securitisation, where the RBA cannot be used; or
(ii) another kind of securitisation, where the ratings-based approach cannot be used, and the supervisory formula (SF) cannot be used because the exposures in the pool, or a material proportion of them, were not originated by the ADI
the ADI may, subject to APRA’s approval, use the internal assessment approach. In addition, the ADI must ensure that all the conditions detailed in paragraphs 12 to 15 of this Attachment are satisfied;
(c)for facilities where the ADI cannot use the ratings-based or internal assessment approaches and all other securitisation exposures where the ratings-based approach cannot be used, the SF, as detailed in paragraphs 18 to 38 of this Attachment, may be applied (unless the ADI cannot use the SF because the ADI is unable to reliably calculate KIRB);
(d)for an eligible facility to which none of the approaches detailed in paragraphs 2(a) to 2(c) of this Attachment can be applied, the ADI may apply, subject to written approval from APRA, the approach detailed in paragraph 39 of this Attachment; and
(e)for a securitisation exposure to which none of the approaches detailed in paragraphs 2(a) to 2(d) of this Attachment can be applied, the exposure must be risk-weighted at 1250 per cent for capital adequacy purposes.
Gain on sale
Irrespective of the approach applied under paragraph 2 of this Attachment, an ADI must deduct any gain on sale from its Common Equity Tier 1 Capital.
Ratings-based approach
As detailed in Attachment B, the risk-weighted asset amount of a securitisation or resecuritisation exposure must be calculated by multiplying the exposure value or, in the case of an off-balance sheet exposure, the credit equivalent amount, by the relevant risk-weight.
The relevant risk-weight under the ratings-based approach depends on:
(a)the credit rating grade assigned to the securitisation exposure by an ECAI, or an inferred rating (as detailed in paragraphs 10 and 11 of this Attachment);
(b)whether the rating (external or inferred) represents a long-term or short-term rating;
(c)the granularity of the pool (as detailed in paragraph 8 of this Attachment); and
(d)the seniority of the securitisation exposure.
Subject to paragraph 5 of this Attachment, an ADI must apply the risk-weights in Table 5 when:
(a)an external credit assessment exists in the form of a long-term rating;
(b)an inferred rating based on an external long-term rating is available; or
(c)an internal assessment has been mapped to an external long-term rating as detailed in paragraph 12 of this Attachment.
Table 5: External credit assessment risk-weights
Securitisation Exposures Resecuritisation Exposures Credit rating grade Risk-weights for the senior positions and eligible senior IAA exposures
Column A
Base risk-weights
Column B
Risk-weights for tranches backed by non-granular pools
Column C
Senior
Column D
Non-senior
Column E
1
7% 12% 20% 20% 30% 2 8% 15% 25% 25% 40% 3 10% 18% 35% 35% 50% 4 12% 20% 35% 40% 65% 5 20% 35% 35% 60% 100% 6 35% 50% 50% 100% 150% 7 60% 75% 75% 150% 225% 8 100% 100% 100% 200% 350% 9 250% 250% 250% 300% 500% 10 425% 425% 425% 500% 650% 11 650% 650% 650% 750% 850% 12 1250% 1250% 1250% 1250% 1250%
Subject to paragraph 5 of this Attachment, an ADI must apply the risk-weights in Table 6 when:
(a)an external credit assessment exists in the form of a short-term rating; or
(b)an inferred rating based on an external short-term rating is available.
Table 6: Short-term rating and risk-weights
Securitisation Exposures Resecuritisation Exposures Credit rating grade
Risk-weights for senior positions
Column A
Base risk-weights
Column B
Risk-weights for tranches backed by non-granular pools
Column C
Senior
Column D
Non-Senior
Column E
1 7% 12% 20% 20% 30% 2 12% 20% 35% 40% 65% 3 60% 75% 75% 150% 225% 4/unrated 1250% 1250% 1250% 1250% 1250%
For securitisation exposures, an ADI must apply the risk-weights in paragraphs 6 and 7 of this Attachment based on the effective number of underlying exposures (N, as defined in paragraphs 27 to 29 of this Attachment) in a pool as follows:
Uncommitted CCF % Retail credit lines
3-month average excess spread
133.33% or more of trapping point 0 Less than 133.33% to 100% of trapping point 1 Less than 100% to 75% of trapping point 2 Less than 75% to 50% of trapping point 10 Less than 50% to 25% of trapping point 20 Less than 25% 40 Non-retail credit lines 90 Committed Retail credit lines 90 Non-retail credit lines 90
For non-controlled early amortisation structures, the following CCFs apply in Table 10 below.
Table 10: Credit conversion factors - Non-controlled early amortisation structures
Uncommitted CCF% Retail credit lines
3-month average excess spread
133.33% or more of trapping point 0 Less than 133.33% to 100% of trapping point 5 Less than 100% to 75% of trapping point 15 Less than 75% to 50% of trapping point 50 Less than 50% of trapping point 100 Non-retail credit lines 100 Committed Retail credit lines 100 Non-retail credit lines 100
0
0
0