SECTION
217.41—Operational Requirements for Securitization Exposures
(a) Operational criteria for
traditional securitizations. A Board-regulated institution that
transfers exposures it has originated or purchased to a securitization
SPE or other third party in connection with a traditional securitization
may exclude the exposures from the calculation of its risk-weighted
assets only if each condition in this section is satisfied. A Board-regulated
institution that meets these conditions must hold risk-based capital
against any credit risk it retains in connection with the securitization.
A Board-regulated institution that fails to meet these conditions
must hold risk-based capital against the transferred exposures as
if they had not been securitized and must deduct from common equity
tier 1 capital any after-tax gain-on-sale resulting from the transaction.
The conditions are:
(1) The exposures are not reported on the
Board-regulated institution’s consolidated balance sheet under GAAP;
(2) The Board-regulated
institution has transferred to one or more third parties credit risk
associated with the underlying exposures;
(3) Any clean-up calls relating to the
securitization are eligible clean-up calls; and
(4) The securitization does not:
(i) Include
one or more underlying exposures in which the borrower is permitted
to vary the drawn amount within an agreed limit under a line of credit;
and
(ii) Contain
an early amortization provision.
(b) Operational criteria for
synthetic securitizations. For synthetic securitizations, a Board-regulated
institution may recognize for risk-based capital purposes the use
of a credit risk mitigant to hedge underlying exposures only if each
condition in this paragraph (b) is satisfied. A Board-regulated institution
that meets these conditions must hold risk-based capital against any
credit risk of the exposures it retains in connection with the synthetic
securitization. A Board-regulated institution that fails to meet these
conditions or chooses not to recognize the credit risk mitigant for
purposes of this section must instead hold risk-based capital against
the underlying exposures as if they had not been synthetically securitized.
The conditions are:
(1) The credit risk mitigant is:
(i) Financial
collateral;
(ii)
A guarantee that meets all criteria as set forth in the definition
of “eligible guarantee” in section 217.2, except for the criteria
in paragraph (3) of that definition; or
(iii) A credit derivative that meets
all criteria as set forth in the definition of “eligible credit derivative”
in section 217.2, except for the criteria in paragraph (3) of the
definition of “eligible guarantee” in section 217.2.
(2) The Board-regulated
institution transfers credit risk associated with the underlying exposures
to one or more third parties, and the terms and conditions in the
credit risk mitigants employed do not include provisions that:
(i) Allow for the termination of the credit protection due to deterioration
in the credit quality of the underlying exposures;
(ii) Require the Board-regulated institution
to alter or replace the underlying exposures to improve the credit
quality of the underlying exposures;
(iii) Increase the Board-regulated institution’s
cost of credit protection in response to deterioration in the credit
quality of the underlying exposures;
(iv) Increase the yield payable to parties
other than the Board-regulated institution in response to a deterioration
in the credit quality of the underlying exposures; or
(v) Provide for increases
in a retained first loss position or credit enhancement provided by
the Board-regulated institution after the inception of the securitization;
(3) The
Board-regulated institution obtains a well-reasoned opinion from legal
counsel that confirms the enforceability of the credit risk mitigant
in all relevant jurisdictions; and
(4) Any clean-up calls relating to the
securitization are eligible clean-up calls.
(c) Due diligence requirements
for securitization exposures.
(1) Except for exposures that are deducted
from common equity tier 1 capital and exposures subject to section
217.42(h), if a Board-regulated institution is unable to demonstrate
to the satisfaction of the Board a comprehensive understanding of
the features of a securitization exposure that would materially affect
the performance of the exposure, the Board-regulated institution must
assign the securitization exposure a risk weight of 1,250 percent.
The Board-regulated institution’s analysis must be commensurate with
the complexity of the securitization exposure and the materiality
of the exposure in relation to its capital.
(2) A Board-regulated institution must
demonstrate its comprehensive understanding of a securitization exposure
under paragraph (c)(1) of this section, for each securitization exposure
by:
(i) Conducting an analysis of the risk
characteristics of a securitization exposure prior to acquiring the
exposure, and documenting such analysis within three business days
after acquiring the exposure, considering:
(A) Structural
features of the securitization that would materially impact the performance
of the exposure, for example, the contractual cash flow waterfall,
waterfall-related triggers, credit enhancements, liquidity enhancements,
fair value triggers, the performance of organizations that service
the exposure, and deal-specific definitions of default;
(B) Relevant information regarding
the performance of the underlying credit exposure(s), for example,
the percentage of loans 30, 60, and 90 days past due; default rates;
prepayment rates; loans in foreclosure; property types; occupancy;
average credit score or other measures of creditworthiness; average
LTV ratio; and industry and geographic diversification data on the
underlying exposure(s);
(C) Relevant market data of the securitization, for example, bid-ask
spread, most recent sales price and historic price volatility, trading
volume, implied market rating, and size, depth and concentration level
of the market for the securitization; and
(D) For resecuritization exposures, performance
information on the underlying securitization exposures, for example,
the issuer name and credit quality, and the characteristics and performance
of the exposures underlying the securitization exposures; and
(ii) On an on-going basis (no less frequently than quarterly), evaluating,
reviewing, and updating as appropriate the analysis required under
paragraph (c)(1) of this section for each securitization exposure.
