MORNBFI Vol. 1 - Planters Development Bank

APP. Q-4611.12.31this is achieved by selling assets toindependent and unaffiliated third partiesat market prices; (ii) allow for increases in aretained first loss position or creditenhancement provided by the originatingbank after the transaction’s inception; or (iii)increase the yield payable to parties otherthan the originating bank, such as investorsand third-party providers of creditenhancements, in response to a deteriorationin the credit quality of the underlying pool.C. Operational requirements for therecognition of risk transference insynthetic securitizations15. For synthetic securitizations, the useof CRM techniques (i.e., collateral,guarantees and credit derivatives) forhedging the underlying exposure may berecognized for risk-based capital purposesonly if the conditions outlined below aresatisfied:a) Credit risk mitigants must complywith the requirements as set out in Part III.Band Part IV of this Framework.b) Eligible collateral is limited to thatspecified in paragraph 34, Part III.B. Eligiblecollateral pledged by SPEs may berecognized.c) Eligible guarantors are defined inparagraph 47, Part III.B. SPEs are notrecognized as eligible guarantors in thesecuritization framework.d) Banks must transfer significantcredit risk associated with the underlyingexposure to third parties.e) The instruments used to transfercredit risk must not contain terms orconditions that limit the amount of creditrisk transferred, such as those providedbelow:i. Clauses that materially limit thecredit protection or credit risk transference(e.g., significant materiality thresholdsbelow which credit protection is deemednot to be triggered even if a credit eventoccurs or those that allow for thetermination of the protection due todeterioration in the credit quality of theunderlying exposures);ii. Clauses that require the originatingbank to alter the underlying exposures toimprove the pool’s weighted average creditquality;iii. Clauses that increase the banks’cost of credit protection in response todeterioration in the pool’s quality;iv. Clauses that increase the yieldpayable to parties other than the originatingbank, such as investors and third-partyproviders of credit enhancements, inresponse to a deterioration in the creditquality of the reference pool; andv. Clauses that provide for increases ina retained first loss position or creditenhancement provided by the originatingbank after the transaction’s inception.f) An opinion must be obtained froma qualified legal counsel that confirms theenforceability of the contracts in all relevantjurisdictions.g) Clean-up calls must satisfy theconditions set out in paragraph 17.16. For synthetic securitizations, theeffect of applying CRM techniques forhedging the underlying exposure are treatedaccording to Part III.B and Part IV of thisFramework. In case there is a maturitymismatch, the capital requirement will bedetermined in accordance with paragraphs50 to 54, Part III.B. When the exposures inthe underlying pool have different maturities,the longest maturity must be taken as thematurity of the pool. Maturity mismatchesmay arise in the context of syntheticsecuritizations when, for example, a bankuses credit derivatives to transfer part or allof the credit risk of a specific pool of assetsto third parties. When the credit derivativesunwind, the transaction will terminate. ThisManual of Regulations for Non-Bank Financial InstitutionsQ RegulationsAppendix Q-46 - Page 29