CP13/6 - CRD IV for Investment Firms - Financial Conduct Authority

FCA 2013/xx
commensurate risk transfer has been achieved the FCA will generally expect
a firm to obtain a public rating on retained tranches and apply the ratingsbased
method (RBM) instead of the SFM. For synthetic securitisations this
might require a firm to create an instrument relating to the retained tranche in
order to obtain a rating on the tranche. However, a firm should be aware that
the use of RBM might not be sufficient to meet the significant risk transfer
test if, notwithstanding the higher RWEA that would apply to the retained
position, there is not a significant transfer of risk for the overall transaction. A
firm should ensure it has regard to articles 268 and 269 of the EU CRR (Use
of credit assessment by ECAIs) when obtaining public ratings on retained
positions.
4.4.26 G A firm may still be able to demonstrate significant risk transfer without a
rating but the FCA believes that this is likely to be exceptional and a firm is
expected to submit any proposal to do so to the FCA before claiming any
capital relief. Two examples of ‘exceptional’ cases are where it is not
possible to obtain a rating from an eligible ECAI or where the small size of a
transaction makes the cost of obtaining a rating disproportionate. In each case
the firm must provide the FCA with sufficient evidence of such
‘exceptionality’. In the first example, the FCA expects this to include written
confirmation that no eligible ECAIs were prepared to rate the transaction. In
the second example, the FCA expects a firm to provide an analysis of the
costs of obtaining a rating relative to the potential capital reduction available
from the transaction. The FCA does not expect a firm to seek to exploit the
boundary of what might constitute ‘exceptional’ cases (eg, by deliberately
structuring many small transactions rather than a single larger transaction).
4.4.27 G A firm with IRB permission that invest in unrated securitisation positions in
the trading book or non-trading book are not required to obtain external
ratings on such positions. However, use of SFM by investors in the trading
book or non-trading book requires prior permission from the FCA, and it will
consider the nature of positions for which use of SFM is being sought as part
of its approval decision-making process.
High cost credit protection and other significant risk transfer considerations
4.4.28 G Any reduction in own funds requirements achieved through securitisation
should be matched with a commensurate transfer of risk to third parties.
Articles 243 (Traditional securitisation) and 244 (Synthetic securitisation) of
the EU CRR set out that if the FCA decides that the possible reduction in riskweighted
exposure amounts which would be achieved through securitisation
is not matched by such commensurate transfer of risk, it will determine that
significant risk transfer has not been achieved by this transaction.
4.4.29 G This substance-over-form principle also applies to the assessment of the
minimum requirements contained in articles 243(5) and 244(5) of the EU
CRR. In particular, the instruments used to transfer credit risk must not
contain any terms or conditions which materially limit the amount of risk
transferred. For example, where losses or defaults occur in the pool (ie,
deterioration in the credit quality of the underlying pool) the originator’s net
cost of protection or the yield payable to investors should not increase. Legal
counsel's opinion (as required under articles 243(5)(b) and 244(5)(d) of the
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