Regulation (EU) No 575/2013 of the European Parliament and of the CouncilShow full title

[X1 [F1 Subsection 3 U.K. Methods to calculate risk-weighted exposure amounts

Article 258 U.K. Conditions for the use of the Internal Ratings Based Approach (SEC-IRBA)

1 . Institutions shall use the SEC-IRBA to calculate risk-weighted exposure amounts in relation to a securitisation position where the following conditions are met:

( a ) the position is backed by an IRB pool or a mixed pool, provided that, in the latter case, the institution is able to calculate K _IRB in accordance with Section 3 on a minimum of 95 % of the underlying exposure amount;

( b ) there is sufficient information available in relation to the underlying exposures of the securitisation for the institution to be able to calculate K _IRB ; and

( c ) the institution has not been precluded from using the SEC-IRBA in relation to a specified securitisation position in accordance with paragraph 2.

2 . [F2 The competent authority] may on a case-by-case basis preclude the use of the SEC-IRBA where securitisations have highly complex or risky features. For these purposes, the following may be regarded as highly complex or risky features:

( a ) credit enhancement that can be eroded for reasons other than portfolio losses;

( b ) pools of underlying exposures with a high degree of internal correlation as a result of concentrated exposures to single sectors or geographical areas;

( c ) transactions where the repayment of the securitisation positions is highly dependent on risk drivers not reflected in K _IRB ; or

( d ) highly complex loss allocations between tranches.

Textual Amendments

F2 Words in Art. 258(2) substituted (31.12.2020) by The Securitisation (Amendment) (EU Exit) Regulations 2019 (S.I. 2019/660), regs. 1(2), 41(g) (with savings in S.I. 2019/680, reg. 11); 2020 c. 1, Sch. 5 para. 1(1)

Article 259 U.K. Calculation of risk-weighted exposure amounts under the SEC-IRBA

1. Under the SEC-IRBA, the risk-weighted exposure amount for a securitisation position shall be calculated by multiplying the exposure value of the position calculated in accordance with Article 248 by the applicable risk weight determined as follows, in all cases subject to a floor of 15 %:

RW = 1 250  %	when D ≤ K IRB
	when A ≥ K IRB
	when A < K IRB < D

where:

K _IRB

is the capital charge of the pool of underlying exposures as defined in Article 255

D

is the detachment point as determined in accordance with Article 256

A

is the attachment point as determined in accordance with Article 256

where:

a

=

– (1/(p * K _IRB ))

u

=

D – K _IRB

l

=

max (A – K _IRB ; 0)

where:

where:

N

is the effective number of exposures in the pool of underlying exposures, calculated in accordance with paragraph 4;

LGD

is the exposure-weighted average loss-given-default of the pool of underlying exposures, calculated in accordance with paragraph 5;

M _T

is the maturity of the tranche as determined in accordance with Article 257.

The parameters A, B, C, D, and E shall be determined according to the following look-up table:

		A	B	C	D	E
Non-retail	Senior, granular (N ≥ 25)	0	3,56	-1,85	0,55	0,07
	Senior, non-granular (N < 25)	0,11	2,61	-2,91	0,68	0,07
	Non-senior, granular (N ≥ 25)	0,16	2,87	-1,03	0,21	0,07
	Non-senior, non-granular (N < 25)	0,22	2,35	-2,46	0,48	0,07
Retail	Senior	0	0	-7,48	0,71	0,24
	Non-senior	0	0	-5,78	0,55	0,27

2. If the underlying IRB pool comprises both retail and non-retail exposures, the pool shall be divided into one retail and one non-retail subpool and, for each subpool, a separate p-parameter (and the corresponding input parameters N, K _IRB and LGD) shall be estimated. Subsequently, a weighted average p-parameter for the transaction shall be calculated on the basis of the p-parameters of each subpool and the nominal size of the exposures in each subpool.

3. Where an institution applies the SEC-IRBA to a mixed pool, the calculation of the p-parameter shall be based on the underlying exposures subject to the IRB Approach only. The underlying exposures subject to the Standardised Approach shall be ignored for these purposes.

4. The effective number of exposures (N) shall be calculated as follows:

where EAD _i represents the exposure value associated with the ith exposure in the pool.

Multiple exposures to the same obligor shall be consolidated and treated as a single exposure.

5. The exposure-weighted average LGD shall be calculated as follows:

where LGD _i represents the average LGD associated with all exposures to the ith obligor.

Where credit and dilution risks for purchased receivables are managed in an aggregate manner in a securitisation, the LGD input shall be construed as a weighted average of the LGD for credit risk and 100 % LGD for dilution risk. The weights shall be the stand-alone IRB Approach capital requirements for credit risk and dilution risk, respectively. For these purposes, the presence of a single reserve fund or overcollateralisation available to cover losses from either credit or dilution risk may be regarded as an indication that these risks are managed in an aggregate manner.

6. Where the share of the largest underlying exposure in the pool (C ₁ ) is no more than 3 %, institutions may use the following simplified method to calculate N and the exposure-weighted average LGDs:

LGD = 0,50

where

C _m

denotes the share of the pool corresponding to the sum of the largest m exposures; and

m

is set by the institution.

If only C ₁ is available and this amount is no more than 0,03, then the institution may set LGD as 0,50 and N as 1/C ₁ .

7. Where the position is backed by a mixed pool and the institution is able to calculate K _IRB on at least 95 % of the underlying exposure amounts in accordance with point (a) of Article 258(1), the institution shall calculate the capital charge for the pool of underlying exposures as:

where

d is the share of the exposure amount of underlying exposures for which the institution can calculate K _IRB over the exposure amount of all underlying exposures.

8. Where an institution has a securitisation position in the form of a derivative to hedge market risks, including interest rate or currency risks, the institution may attribute to that derivative an inferred risk weight equivalent to the risk weight of the reference position calculated in accordance with this Article.

For the purposes of the first subparagraph, the reference position shall be the position that is pari passu in all respects to the derivative or, in the absence of such pari passu position, the position that is immediately subordinate to the derivative.

Article 260 U.K. Treatment of STS securitisations under the SEC-IRBA

Under the SEC-IRBA, the risk weight for a position in an STS securitisation shall be calculated in accordance with Article 259, subject to the following modifications:

risk-weight floor for senior securitisation positions = 10 %

Article 261 U.K. Calculation of risk-weighted exposure amounts under the Standardised Approach (SEC-SA)

1. Under the SEC-SA, the risk-weighted exposure amount for a position in a securitisation shall be calculated by multiplying the exposure value of the position as calculated in accordance with Article 248 by the applicable risk weight determined as follows, in all cases subject to a floor of 15 %:

RW = 1 250  %	when D ≤ K A
	when A ≥ K A
	when A < K A < D

where:

D

is the detachment point as determined in accordance with Article 256;

A

is the attachment point as determined in accordance with Article 256;

K _A

is a parameter calculated in accordance with paragraph 2;

where:

a

=

– (1/(p · K _A ))

u

=

D – K _A

l

=

max (A – K _A ; 0)

p

=

1 for a securitisation exposure that is not a re-securitisation exposure

2. For the purposes of paragraph 1, K _A shall be calculated as follows:

where:

K _SA is the capital charge of the underlying pool as defined in Article 255;

W = ratio of:

(a)

the sum of the nominal amount of underlying exposures in default, to

(b)

the sum of the nominal amount of all underlying exposures.

For these purposes, an exposure in default shall mean an underlying exposure which is either: (i) 90 days or more past due; (ii) subject to bankruptcy or insolvency proceedings; (iii) subject to foreclosure or similar proceeding; or (iv) in default in accordance with the securitisation documentation.

Where an institution does not know the delinquency status for 5 % or less of underlying exposures in the pool, the institution may use the SEC-SA subject to the following adjustment in the calculation K _A :

Where the institution does not know the delinquency status for more than 5 % of underlying exposures in the pool, the position in the securitisation must be risk-weighted at 1 250  %.

3. Where an institution has a securitisation position in the form of a derivative to hedge market risks, including interest rate or currency risks, the institution may attribute to that derivative an inferred risk weight equivalent to the risk weight of the reference position calculated in accordance with this Article.

For the purposes of this paragraph, the reference position shall be the position that is pari passu in all respects to the derivative or, in the absence of such pari passu position, the position that is immediately subordinate to the derivative.

Article 262 U.K. Treatment of STS securitisations under the SEC-SA

Under the SEC-SA the risk weight for a position in an STS securitisation shall be calculated in accordance with Article 261, subject to the following modifications:

• risk-weight floor for senior securitisation positions = 10 %

• p = 0,5

Article 263 U.K. Calculation of risk-weighted exposure amounts under the External Ratings Based Approach (SEC-ERBA)

1. Under the SEC-ERBA, the risk-weighted exposure amount for a securitisation position shall be calculated by multiplying the exposure value of the position as calculated in accordance with Article 248 by the applicable risk weight in accordance with this Article.

2. For exposures with short-term credit assessments or when a rating based on a short-term credit assessment may be inferred in accordance with paragraph 7, the following risk weights shall apply:

Table 1

Credit Quality Step	1	2	3	All other ratings
Risk weight	15  %	50  %	100  %	1 250  %

3. For exposures with long-term credit assessments or when a rating based on a long-term credit assessment may be inferred in accordance with paragraph 7 of this Article, the risk weights set out in Table 2 shall apply, adjusted as applicable for tranche maturity (M _T ) in accordance with Article 257 and paragraph 4 of this Article and for tranche thickness for non-senior tranches in accordance with paragraph 5 of this Article:

Table 2

Credit Quality Step	Senior tranche		Non-senior (thin) tranche
	Tranche maturity (M T )		Tranche maturity (M T )
	1 year	5 years	1 year	5 years
1	15  %	20  %	15  %	70  %
2	15  %	30  %	15  %	90  %
3	25  %	40  %	30  %	120  %
4	30  %	45  %	40  %	140  %
5	40  %	50  %	60  %	160  %
6	50  %	65  %	80  %	180  %
7	60  %	70  %	120  %	210  %
8	75  %	90  %	170  %	260  %
9	90  %	105  %	220  %	310  %
10	120  %	140  %	330  %	420  %
11	140  %	160  %	470  %	580  %
12	160  %	180  %	620  %	760  %
13	200  %	225  %	750  %	860  %
14	250  %	280  %	900  %	950  %
15	310  %	340  %	1 050  %	1 050  %
16	380  %	420  %	1 130  %	1 130  %
17	460  %	505  %	1 250  %	1 250  %
All other	1 250  %	1 250  %	1 250  %	1 250  %

4. In order to determine the risk weight for tranches with a maturity between 1 and 5 years, institutions shall use linear interpolation between the risk weights applicable for 1 and 5 years maturity respectively in accordance with Table 2.

5. In order to account for tranche thickness, institutions shall calculate the risk weight for non-senior tranches as follows:

where

T = tranche thickness measured as D – A

where

D

is the detachment point as determined in accordance with Article 256

A

is the attachment point as determined in accordance with Article 256

6. The risk weights for non-senior tranches resulting from paragraphs 3, 4 and 5 shall be subject to a floor of 15 %. In addition, the resulting risk weights shall be no lower than the risk weight corresponding to a hypothetical senior tranche of the same securitisation with the same credit assessment and maturity.

7. For the purposes of using inferred ratings, institutions shall attribute to an unrated position an inferred rating equivalent to the credit assessment of a rated reference position which meets all of the following conditions:

(a) the reference position ranks pari passu in all respects to the unrated securitisation position or, in the absence of a pari passu ranking position, the reference position is immediately subordinate to the unrated position;

(b) the reference position does not benefit from any third-party guarantees or other credit enhancements that are not available to the unrated position;

(c) the maturity of the reference position shall be equal to or longer than that of the unrated position in question;

(d) on an ongoing basis, any inferred rating shall be updated to reflect any changes in the credit assessment of the reference position.

8. Where an institution has a securitisation position in the form of a derivative to hedge market risks, including interest rate or currency risks, the institution may attribute to that derivative an inferred risk weight equivalent to the risk weight of the reference position calculated in accordance with this Article.

For the purposes of the first subparagraph, the reference position shall be the position that is pari passu in all respects to the derivative or, in the absence of such pari passu position, the position that is immediately subordinate to the derivative.

Article 264 U.K. Treatment of STS securitisations under the SEC-ERBA

1. Under the SEC-ERBA, the risk weight for a position in an STS securitisation shall be calculated in accordance with Article 263, subject to the modifications laid down in this Article.

2. For exposures with short-term credit assessments or when a rating based on a short-term credit assessment may be inferred in accordance with Article 263(7), the following risk weights shall apply:

Table 3

Credit Quality Step	1	2	3	All other ratings
Risk weight	10  %	30  %	60  %	1 250  %

3. For exposures with long-term credit assessments or when a rating based on a long-term credit assessment may be inferred in accordance with Article 263(7), risk weights shall be determined in accordance with Table 4, adjusted for tranche maturity (M _T ) in accordance with Article 257 and Article 263(4) and for tranche thickness for non-senior tranches in accordance with Article 263(5):

Table 4

Credit Quality Step	Senior tranche		Non-senior (thin) tranche
	Tranche maturity (M T )		Tranche maturity (M T )
	1 year	5 years	1 year	5 years
1	10  %	10  %	15  %	40  %
2	10  %	15  %	15  %	55  %
3	15  %	20  %	15  %	70  %
4	15  %	25  %	25  %	80  %
5	20  %	30  %	35  %	95  %
6	30  %	40  %	60  %	135  %
7	35  %	40  %	95  %	170  %
8	45  %	55  %	150  %	225  %
9	55  %	65  %	180  %	255  %
10	70  %	85  %	270  %	345  %
11	120  %	135  %	405  %	500  %
12	135  %	155  %	535  %	655  %
13	170  %	195  %	645  %	740  %
14	225  %	250  %	810  %	855  %
15	280  %	305  %	945  %	945  %
16	340  %	380  %	1 015  %	1 015  %
17	415  %	455  %	1 250  %	1 250  %
All other	1 250  %	1 250  %	1 250  %	1 250  %

Article 265 U.K. Scope and operational requirements for the Internal Assessment Approach

1 . Institutions may calculate the risk-weighted exposure amounts for unrated positions in ABCP programmes or ABCP transactions under the Internal Assessment Approach in accordance with Article 266 where the conditions set out in paragraph 2 of this Article are met.

Where an institution has received permission to apply the Internal Assessment Approach in accordance with paragraph 2 of this Article, and a specific position in an ABCP programme or ABCP transaction falls within the scope of application covered by such permission, the institution shall apply that approach to calculate the risk-weighted exposure amount of that position.

2 . [F3 The competent authority] shall grant institutions permission to apply the Internal Assessment Approach within a clearly defined scope of application where all of the following conditions are met:

( a ) all positions in the commercial paper issued from the ABCP programme are rated positions;

( b ) the internal assessment of the credit quality of the position reflects the publicly available assessment methodology of one or more ECAIs for the rating of securitisation positions backed by underlying exposures of the type securitised;

( c ) the commercial paper issued from the ABCP programme is predominantly issued to third-party investors;

( d ) the institution’s internal assessment process is at least as conservative as the publicly available assessments of those ECAIs which have provided an external rating for the commercial paper issued from the ABCP programme, in particular with regard to stress factors and other relevant quantitative elements;

( e ) the institution’s internal assessment methodology takes into account all relevant publicly available rating methodologies of the ECAIs that rate the commercial paper of the ABCP programme and includes rating grades corresponding to the credit assessments of ECAIs. The institution shall document in its internal records an explanatory statement describing how the requirements set out in this point have been met and shall update such statement on a regular basis;

( f ) the institution uses the internal assessment methodology for internal risk management purposes, including in its decision-making, management information and internal capital allocation processes;

( g ) internal or external auditors, an ECAI, or the institution’s internal credit review or risk management function perform regular reviews of the internal assessment process and the quality of the internal assessments of the credit quality of the institution’s exposures to an ABCP programme or ABCP transaction;

( h ) the institution tracks the performance of its internal ratings over time to evaluate the performance of its internal assessment methodology and makes adjustments, as necessary, to that methodology when the performance of the exposures routinely diverges from that indicated by the internal ratings;

( i ) the ABCP programme includes underwriting and liability management standards in the form of guidelines to the programme administrator on, at least:

(i)

the asset eligibility criteria, subject to point (j);

(ii)

the types and monetary value of the exposures arising from the provision of liquidity facilities and credit enhancements;

(iii)

the loss distribution between the securitisation positions in the ABCP programme or ABCP transaction;

(iv)

the legal and economic isolation of the transferred assets from the entity selling the assets;

( j ) the asset eligibility criteria in the ABCP programme provide for, at least:

(i)

exclusion of the purchase of assets that are significantly past due or defaulted;

(ii)

limitation of excessive concentration to individual obligor or geographic area; and

(iii)

limitation of the tenor of the assets to be purchased;

( k ) an analysis of the asset seller’s credit risk and business profile is performed including, at least, an assessment of the seller’s:

(i)

past and expected future financial performance;

(ii)

current market position and expected future competitiveness;

(iii)

leverage, cash flow, interest coverage and debt rating; and

(iv)

underwriting standards, servicing capabilities, and collection processes;

( l ) the ABCP programme has collection policies and processes that take into account the operational capability and credit quality of the servicer and comprises features that mitigate performance-related risks of the seller and the servicer. For the purposes of this point, performance-related risks may be mitigated through triggers based on the seller or servicer’s current credit quality to prevent commingling of funds in the event of the seller’s or servicer’s default;

( m ) the aggregated estimate of loss on an asset pool that may be purchased under the ABCP programme takes into account all sources of potential risk, such as credit and dilution risk;

( n ) where the seller-provided credit enhancement is sized based only on credit-related losses and dilution risk is material for the particular asset pool, the ABCP programme comprises a separate reserve for dilution risk;

( o ) the size of the required enhancement level in the ABCP programme is calculated taking into account several years of historical information, including losses, delinquencies, dilutions, and the turnover rate of the receivables;

( p ) the ABCP programme comprises structural features in the purchase of exposures in order to mitigate potential credit deterioration of the underlying portfolio. Such features may include wind-down triggers specific to a pool of exposures;

( q ) the institution evaluates the characteristics of the underlying asset pool, such as its weighted-average credit score, and identifies any concentrations to an individual obligor or geographic area and the granularity of the asset pool.

3 . Where the institution’s internal audit, credit review, or risk management functions perform the review provided for in point (g) of paragraph 2, those functions shall be independent from the institution’s internal functions dealing with ABCP programme business and customer relations.

4 . Institutions which have received permission to apply the Internal Assessment Approach shall not revert to the use of other methods for positions that fall within scope of application of the Internal Assessment Approach unless both of the following conditions are met:

( a ) the institution has demonstrated to the satisfaction of the competent authority that the institution has good cause to do so;

( b ) the institution has received the prior permission of the competent authority.

Textual Amendments

F3 Words in Art. 265(2) substituted (31.12.2020) by The Securitisation (Amendment) (EU Exit) Regulations 2019 (S.I. 2019/660), regs. 1(2), 41(h) (with savings in S.I. 2019/680, reg. 11); 2020 c. 1, Sch. 5 para. 1(1)

Article 266 U.K. Calculation of risk-weighted exposure amounts under the Internal Assessment Approach

1. Under the Internal Assessment Approach, the institution shall assign the unrated position in the ABCP programme or ABCP transaction to one of the rating grades laid down in point (e) of Article 265(2) on the basis of its internal assessment. The position shall be attributed a derived rating which shall be the same as the credit assessments corresponding to that rating grade as laid down in point (e) of Article 265(2).

2. The rating derived in accordance with paragraph 1 shall be at least at the level of investment grade or better at the time it was first assigned and shall be regarded as an eligible credit assessment by an ECAI for the purposes of calculating risk-weighted exposure amounts in accordance with Article 263 or Article 264, as applicable.] ]