MORNBFI Vol. 1 - Planters Development Bank

APP. Q-4611.12.31implies that the effective maturity of thetranches of the synthetic securitization maydiffer from that of the underlying exposures.Originating banks of syntheticsecuritizations with such maturitymismatches must deduct all retainedpositions that are unrated or rated belowinvestment grade. Accordingly, whendeduction is required, maturity mismatchesare not taken into account. For all othersecuritization exposures, the bank mustapply the maturity mismatch treatment setforth in paragraphs 50 to 54, Part III.B.D. Operational requirements andtreatment of clean-up calls17. For securitization transactions thatinclude a clean-up call, no capital will berequired due to the presence of a clean-upcall if the following conditions are met: (i)the exercise of the clean-up call must notbe mandatory, in form or in substance, butrather must be at the discretion of theoriginating bank; (ii) the clean-up call mustnot be structured to avoid allocating lossesto credit enhancements or positions held byinvestors or otherwise structured to providecredit enhancement; and (iii) the clean-upcall must only be exercisable when tenpercent (10%) or less of the originalunderlying portfolio, or securities issuedremain, or, for synthetic securitizations,when ten percent (10%) or less of theoriginal reference portfolio value remains.18. Securitization transactions thatinclude a clean-up call that does not meetall of the criteria stated in paragraph 17 resultin a capital requirement for the originatingbank. For a traditional securitization, theunderlying exposures must be treated as ifthey were not securitized. Additionally,banks must not recognize in regulatorycapital any gain-on-sale, as defined inparagraph 23. For synthetic securitization,the bank purchasing protection must holdcapital against the entire amount of thesecuritized exposures as if they did notbenefit from any credit protection. Sametreatment applies for syntheticsecuritization that incorporates a call, otherthan a clean-up call, that effectivelyterminates the transaction and thepurchased credit protection on a specifieddate.19. If a clean-up call, when exercised,is found to serve as a credit enhancement,the exercise of the clean-up call must beconsidered a form of implicit supportprovided by the bank and must be treatedin accordance with paragraph 26.E. Operational requirements for use ofexternal credit assessments20. The following operational criteriaconcerning the use of external creditassessments apply in the securitizationframework:a) To be eligible for risk-weightingpurposes, the external credit assessmentmust take into account and reflect the entireamount of credit risk exposure the bankhas with regard to all payments owed toit. For example, if a bank is owed bothprincipal and interest, the assessment mustfully take into account and reflect the creditrisk associated with timely repayment ofboth principal and interest.b) The external credit assessmentsmust be from an eligible ECAI asrecognized by the bank’s nationalsupervisor in accordance with Part III.C.An eligible credit assessment must bepublicly available. In other words, a ratingmust be published in an accessible formand included in the ECAI’s transitionmatrix. Consequently, ratings that are madeavailable only to the parties to a transactiondo not satisfy this requirement.c) Eligible ECAIs must have ademonstrated expertise in assessingsecuritizations, which may be evidencedby strong market acceptance.Q RegulationsAppendix Q-46 - Page 30Manual of Regulations for Non-Bank Financial Institutions