MORNBFI Vol. 1 - Planters Development Bank

APP. Q-4611.12.31credit rating of at least BBB- or its equivalent.A ten percent (10%) add-on factor appliesto all other reference obligations. However,a protection seller in a CDS shall only besubject to the add-on factor if it is subject tocloseout upon the insolvency of theprotection buyer while the underlying is stillsolvent. The add-on in this case should becapped to the amount of unpaid premiums.43. Where the credit derivative is a firstto default transaction, the add-on will bedetermined by the lowest credit qualityunderlying in the basket, i.e., if there are anynon-investment grade or unrated items inthe basket, the ten percent (10%) add-onshould be used. For second and subsequentto default transactions, underlying assetsshould continue to be allocated accordingto the credit quality, i.e., the second lowestcredit quality will determine the add-on fora second to default transaction, etc.44. Where the credit derivative isreferenced proportionately to multipleobligations, the add-on factor will follow theadd-on factor applicable for the obligationwith the biggest share. If the protection isequally proportioned, the highest add-onfactor should be used.Part V. Securitization1. Banks must apply the securitizationframework for determining regulatory capitalrequirements on their securitizationexposures. Securitization exposures caninclude but are not restricted to thefollowing: asset-backed securities, mortgagebackedsecurities, credit enhancements,liquidity facilities, interest rate or currencyswaps, and credit derivatives. Underlyinginstruments in the pool being securitizedmay include but are not restricted to thefollowing: loans, commitments, assetbackedand mortgage-backed securities,corporate bonds, equity securities, andprivate equity investments.2. Since securitizations may bestructured in many different ways, the capitaltreatment of a securitization exposure mustbe determined on the basis of its economicsubstance rather than its legal form. Thecontents of this Part are just the general rulesto be followed in computing capitalrequirements for securitization exposures.A bank should therefore consult the BSP-SES when there is uncertainty about thecomputation of capital requirements, oreven about whether a given transactionshould be considered a securitization.A. Definitions and general terminology3. Traditional securitization – astructure where the cash flow from anunderlying pool of exposures is used toservice at least two (2) different stratifiedrisk positions or tranches reflecting differentdegrees of credit risk. Payments to theinvestors depend upon the performance ofthe specified underlying exposures, asopposed to being derived from anobligation of the entity originating thoseexposures. The stratified/tranched structuresthat characterize securitizations differ fromordinary senior/subordinated debtinstruments in that junior securitizationtranches can absorb losses withoutinterrupting contractual payments to moresenior tranches, whereas subordination ina senior/subordinated debt structure is amatter of priority of rights to the proceedsof liquidation.4. Synthetic securitization – a structurewith at least two (2) different stratified riskpositions or tranches that reflect differentdegrees of credit risk where credit risk ofan underlying pool of exposures istransferred, in whole or in part, through theuse of funded (e.g., credit-linked notes) orunfunded (e.g., credit default swaps) creditderivatives or guarantees that serve to hedgethe credit risk of the portfolio. Accordingly,the investors’ potential risk is dependentQ RegulationsAppendix Q-46 - Page 26Manual of Regulations for Non-Bank Financial Institutions