24th March 2014
Basel Committee for Banking Supervision
c/o Bank for International Settlements
CH-4002
Basel, Switzerland
Submitted via email: baselcommittee@bis.org
Joint Associations' response to the second Consultative Document on Revisions to theBasel securitisation framework
The Commercial Real Estate Finance Council (CREFC), the Commercial Real Estate FinanceCouncil Europe (CREFC Europe), the Global Financial Markets Association (GFMA)(including the Association for Financial Markets in Europe (AFME), the Asia Securities
Industry & Financial Markets Association (ASIFMA) and the Securities Industry & Financial
Markets Association (SIFMA)), the Institute of International Finance (IIF), the International
Association of Credit Portfolio Managers (IACPM), the International Swaps and Derivatives
Association, the Securitisation Forum of Japan (SFJ) and the Structured Finance Industry
Group (SFIG) (together the Joint Associations)1 welcome the opportunity to comment on the
proposals set out in the second consultative document "Revisions to the Basel Securitisation
Framework" published by the Basel Committee on Banking Supervision (BCBS or
Committee) on 21 December 2013 (Consultative Document or CD).2
We look forward to discussing our response with Committee representatives at theirscheduled meeting with industry representatives in April. We would be pleased to discuss1
2

See attached Annex 1 for a description of each of the Joint Associations.
BCBS, Consultative Document: Revisions to the Basel securitisation framework (December 2013),
available at http://www.bis.org/publ/bcbs269.pdf.

any of these comments in further detail, or to provide any other assistance or data that would
help facilitate the Committee's review and analysis.
Introduction and overview
We greatly appreciate the work the Committee has done to improve the proposed revised
framework taking into account the comments it received on the first consultative document(BCBS 236)3 and results of the first quantitative impact study (QIS). In particular, wewelcome the development of a simpler and more straightforward hierarchy of approaches,some reduction of risk weights for higher credit quality exposures, including reduction of therisk weight floor, recognition of credit protection provided by excess spread, preservation ofexisting flexibility in application of the Internal Ratings-Based Approach (IRBA),
preservation of the Internal Assessments Approach (IAA), and requiring one rather than two
qualifying credit ratings for application of the External Ratings-Based Approach (ERBA).
However, we believe that the proposed capital requirements for securitisation exposures,
especially for higher quality exposures and for medium-term and longer-maturity
transactions, remain much higher than justified by historical loss incidence in most asset
classes, by comparison with other methods of finance or in relation to the capitalrequirements of the underlying asset pools. These excessive capital requirements will
discourage banks from investing in or otherwise acquiring exposure to securitisationtransactions. Together with the many other recent, pending and proposed regulatory
measures affecting securitisation, they are likely to impede the redevelopment of this usefuland secure form of finance.
We therefore recommend specific changes to certain of the modelling assumptions andparameters used in formulating and calibrating the approaches, as well as changes to theoperating conditions for certain approaches and to the risk weight floor and capital cap
provisions. These changes, if adopted, will serve the goals of the revisions by helping tocreate a simpler, more transparent framework, while better aligning securitisation risk
weights with empirical data, competing products and underlying risks.
Summary of recommendations
We summarise below our main recommendations, which we discuss in more detail in thefollowing sections.

3



Recalibrate the IRBA and the standardised approach (SA) according to asset class sothat securitisation capital requirements are brought more closely into line withhistorical loss experience for most asset classes, with capital requirements for otherforms of finance and with those for the underlying asset pools.



Adjust the calibration of approaches in relation to each other so that IRBA generally
produces lower rather than higher risk weights than other approaches for the same
exposures. If that is achieved, allow banks and supervisors to develop more flexible
approaches to application of operating conditions so that banks can use the IRBA
based on information they can get when acting as investors.

BCBS, Consultative Document: Revisions to the Basel securitisation framework (December 2012),
available at http://www.bis.org/publ/bcbs236.pdf.

2

4



Amend the definition of maturity (M) to allow use of published weighted average life
(WAL) tables where available and to take into account expected prepayments basedon supervisory inputs, contractual maturity of the underlying exposures and, inreplenishing transactions, early termination triggers and contractual limits on average
maturity of underlying exposures.



Change the formulation and calibration of p in IRBA to provide for different
parameters for different asset classes, to limit the maximum p of senior and nonsenior tranches to certain percentages, and to lower the floor value of p.



Recalibrate the ERBA in order to achieve a better alignment of its results in relation to
IRBA (which should generally produce lower rather than higher risk weights than
ERBA) and in relation to SA (with which it should be broadly aligned).

For securitisation exposures under interest rate and currency swaps, allow the use ofinferred ratings based on either the pari passu tranche or the next subordinatedtranche.



We wish to confirm that, as is the case today under the Basel II4 internal ratings-based
approach (IRB), banks should consult with and seek approval from their respective
national regulators for the use of the IAA including any requirements for the existenceof a certified IRB approach for a portion of the underlying exposures.

Allow for IAA application to unrated securitisation exposures funded directly bybanks in addition to those held in bank-supported asset-backed commercial paper(ABCP) conduit programmes.

Adjust the standardised approach (SA) to provide more risk sensitivity by specifying
different parameters for different asset types.

In relation to embedded swaps and cash collateral, require no additional capital if
counterparties and structure meet certain criteria, and, where additional capital isrequired, allow use of proxies for calculation of present value (PV).

Provide a lower risk weight floor of 10%.



Allow banks that apply the SA as well as those applying advanced approaches to use
the capital requirements cap when acting as investors, provided they have theinformation needed to calculate the cap under the SA.

Allow banks to apply the capital requirements cap to a securitisation transaction on a
proportional basis according to the largest portion that the bank holds in any trancheof the securitisation or, in the case of a "vertical slice" of all credit risk tranches in asecuritisation, according to the risk-weighted asset amount (RWA) of the vertical slice
divided by the RWA of the pool.

Confirm that aggregate capital requirements for an ABCP conduit sponsor bank's
exposures under liquidity facilities and programme credit enhancement facilities

BCBS, International Convergence of Capital Measurement and Capital Standards: A Revised Framework –Comprehensive Version (June 2006) (BCBS 128), available at http://www.bis.org/publ/bcbs128.pdf.

3

aggregating 100% or more of the ABCP conduit liabilities will not exceed theaggregate capital associated with the underlying securitisation exposures in the
programme.
Refine the wording on resecuritisation to clarify that retranchings of individual ABS
transactions and structures that simply aggregate such retranchings without adding
more correlation risk will not be treated as resecuritisations.



Amend the securitisation due diligence rule to replace the 1250% risk weight penalty
with a proportional additional risk weight as provided in the European Union (EU)Capital Requirements Regulation (CRR)5 Article 407.

Discussion of comments
Economies need securitisation to help finance business and consumers
Increasingly, policy-makers, heads of central banks and directors of regulatory authorities at
the highest levels have recognised and stated publicly that many securitisation transactions
have high credit quality, transparency and structural soundness and that securitisation plays
an important role in facilitating access to capital for businesses and consumers. Accordingly,
they say, regulatory policy should be formed and implemented in a way that, while providing
necessary guidance and restraint, does not unnecessarily stifle the re-growth of this usefulmarket. They note that many regulatory changes have already been put in place to ensure thesafety and soundness of securitisation transactions and markets, and speak of securitisation
not as a threat but as a tool to improve bank funding and support economic growth. Annex 2(Policy support for securitisation) sets out a sampling of such statements.
Changes in bank capital requirements for securitisation affect the wider market as well asbanks. Securitisation increases the availability and reduces the cost of credit to affected
sectors of the real economy through the promotion of secondary market liquidity. If thecapital rules strongly disincentivise banks from holding securitisation exposures, that cansignificantly reduce the attractiveness to other investors of holding those exposures. That
impact is even greater when it adds to other strands of regulation that raise the capital cost ofother investors' holding securitised products.
As pointed out in GFMA's comment letter responding to BCBS 236, 6 the regulatory responseto the financial crisis has already generated a comprehensive and multi-faceted set of rules on
securitisation. Central banks, lawmakers and regulators are beginning to recognise the valueof securitisation and the benefit of the regulatory and market improvements already made.
Annex 3 (Regulatory reform (EU)) sets out a mapping of both securitisation-specificproblems and wider market problems that impacted securitisation during the financial crisis
and EU regulatory reforms already achieved.
Subjecting securitisation exposures held by banks to risk-based capital requirements muchhigher than those that apply under the existing securitisation framework and several times
5

6

Regulation (EU) No 575/2013 of the European Parliament and of the Council on prudential requirements
for credit institutions and investment firms and amending Regulation (EU) No 648/2012, available at
http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2013:176:0001:0337:EN:PDF.
GFMA response to the Consultative Document on Revisions to the Basel Securitisation Framework (18March 2013) (GFMA 2013), available at http://www.bis.org/publ/bcbs236/gfma.pdf, pages 3 and 4.

4

those that apply to other types of financial assets would further discourage banks frominvesting in, originating or sponsoring securitisation transactions. Against the developing
policy trend, it would hamper rather than facilitate the opening up of financial markets to
expand economic activity.
Calibration of capital requirements
The proposed increases in capital requirements are not justified
The absolute level of capital implied by the proposal remains too high, and represents a threat
to the viability of the securitisation market, in spite of both its historical performance andmany positive public statements from high-level policy makers endorsing securitisation.
Though we know the Committee's view is that "strict capital neutrality is not desirable," instating its "Objectives and principles of the revisions", the Committee also recognises that"capital charges for a securitisation should be broadly consistent with the capital charges forthe underlying pool, in particular for senior tranches."7 The revised framework should betterreflect this principle.
The capital required by the current minimum 7% risk weight has been enough to cover
expected loss (EL) and unexpected loss (UL) over the whole history of senior securitisations,
except for US subprime mortgage and certain resecuritisation vehicles such as collateralised
debt obligations (CDOs) backed by ABS. For example, a study of trade receivables
securitisation by the French Banking Federation (FBF) showed that transaction-level credit
enhancement covered almost four times the highest levels of experienced losses. 8 Annex 4(Historical Default Rates for Securitisation: Mid-2007 to End Q3 2013) shows that European
securitisation transactions involving most asset classes experienced low default rates during
the crisis period. High risk weights punish the best quality deals backed by assets such as
prime mortgage loans, auto and equipment loan and lease receivables, consumer credit card
receivables and trade receivables. By making no distinction as to asset class, the proposed
capital requirements would make securitisation unreasonably expensive.
In addition, the proposal still threatens a level playing field between securitisation and otherfinancing techniques. While securitisation is a beneficial financing and risk management tool
designed to isolate risk in a legally highly secure fashion and to transform illiquid assets(such as loans and receivables) into tradable securities, the proposed capital treatment puts it
at a disadvantage in relation to alternatives such as unsecured loans and bonds and various
forms of secured financing. By way of example, for a five year senior AA-rated
securitisation exposure, according to the proposed ERBA risk weight table, the risk weight
would be 50%, while under the Basel II IRB for corporate exposures, a corporate loan withsimilar credit quality and tenor and assumed 40% loss given default (LGD) would have a risk
weight of only 24%. For a one year A-rated exposure, the ERBA securitisation risk weight
would again be 50%, while a corporate loan with similar credit quality and tenor and 40%
LGD would have a risk weight of only 8%.
Rather than selectively burdening this form of finance, regulations should be aimed atlimiting behaviours such as poor underwriting, lack of alignment of interests and excess
78

CD page 4.
See French Banking Federation comments on the BCBS Consultative Document on the revisions to theBaselsecuritisation
framework
BCBS
236
(15
March
2013),
availableat
http://www.bis.org/publ/bcbs236/frenchbankingfe.pdf, pages 67-69.

5

leverage that contributed to the financial crisis. The Committee and other regulatory bodies
have already introduced many measures to strengthen bank operations and curb irresponsible
behaviour (see again Annex 3). Further burdening securitisation with extra capital charges
unrelated to actual risk is not justified and is likely to have market-damaging effects.
The approaches produce surprising and incongruous results
When our members applied the proposed approaches to sample transactions or portfolios, asin the examples set out in Annex 5 (Securitization Capital Analysis),9 they found somesurprising results, such as the following:For a number of transactions, representing several different asset classes (including
private securitisations of prime auto receivables, private securitisations of tradereceivables, US collateralised loan obligations (CLOs) and AAA-rated Dutch
mortgage-backed securities (RMBS)), in all but the most senior tranches where thefloor levels drive the results, the IRBA risk weights for a given transaction werehigher than risk weights produced by ERBA or SA for the same transaction.

For an exposure to AAA-rated Dutch RMBS, an asset class recognised as of thehighest credit quality, IRBA produced a risk weight of 90%, while the ERBA and SA
risk weights were at 25% and 26%. In this transaction, for non-senior tranches, IRBA
would require about seven times as much capital as ERBA.

For US prime RMBS with five-year maturity, the SA risk weights were several times,
and for some highly-rated tranches many times, the risk weights that would apply
under ERBA.



For prime auto ABS with five-year maturity, one AAA-rated tranche would have arisk weight under SA about six times higher than under ERBA, while the mezzanine
tranches (rated AAA, AAA, AA+ and A respectively) would also have, on average,
SA risk weights almost six times higher (including a risk weight of 1221% for a AArated tranche).

The marked divergence between ERBA and SA risk weights, even for highly-rated tranches,
does not match the Committee's statement10 that the relative calibration of the two approaches
will be broadly aligned. It is especially troubling for US banks, who would not be allowed touse the ERBA, and it would result in a highly unlevel playing field between US and non-USbanks and different levels of capital for the same exposures across jurisdictions. That IRBA
frequently generates higher risk weights than both ERBA and SA shows that the IRBA
910

We have noted an inconsistency in the way the 1.06 "scaling factor" is applied in different jurisdictions.
Footnote 26 in the CD points out that "[t]he scaling factor of 1.06 referenced in paragraph 44 of the Basel II
framework is applied to the unexpected loss portion of the calculation of K IRB." This is consistent with its
application in the EU under CRR (Articles 153(1), 154(1) and 261(1)). The wording in paragraph 44 of theBasel II framework ("The scaling factor is applied to the risk-weighted asset amounts for credit risk
assessed under the IRB approach.") is less clear, and US banks applying the US rules (See 78 Fed. Reg. 198
at page 62161) have applied the scaling factor to the entire credit-risk weighted assets amount (including
EL as well as UL). This means that the results shown in Annex 5 are slightly different from what theresults would be under the proposed Basel framework. It also means that under the Basel framework theincongruous excess of IRBA over ERBA and SA risk weights would be even more pronounced (as thescaling factor would be applied only under IRBA and not under ERBA or SA).
CD page 12.

6calibration is too punitive. It also contradicts the Committee's and national regulators' efforts
to encourage banks taking exposure to securitisations to acquire as much information as
possible about the securitised assets, have a solid understanding of the risks involved in thoseassets and form internal risk opinions on the risks involved in the transactions.
Calibration needs to be better aligned between approaches
According to the principle that advanced approaches, using more information and risksensitive models, should produce lower capital requirements, IRBA's calibration needs to be
adjusted so that it more often produces lower, rather than higher, risk weights than ERBA andSA.
IRBA application
IRBA operating conditions need added flexibility to facilitate wide application
We understand the Committee intends that banks will have the same flexibility in applying
IRBA as they have in applying IRB and the supervisory formula approach (SFA) under the
Basel II framework as implemented in their jurisdictions. While preserving existingflexibility is welcome, many of our members believe that banks acting as investors rather
than as sponsors or originators will need more flexibility in order to apply the IRBA moregenerally. It would not be practical or desirable for the Basel framework to set out specificmethods that should be applied to different asset classes and transaction types in different
markets and jurisdictions. Provided the IRBA is properly recalibrated according to theprinciple that the more advanced approaches should in general produce lower risk weights,
the Committee should make clear that it expects national supervisors to work with banks inorder to develop more workable methods of applying IRBA, and should encourage
supervisors to communicate with each other and with the Committee in order to improveconsistency of overall methods and results across jurisdictions.
The investor due diligence requirements added by Basel II.5 11 require that banks understandthe collateral performance, transaction structure and market dynamics for securitisation
exposures in which they invest or acquire exposure; however, our understanding is that banks
are permitted to apply varying methods to accomplish this, including pool-level analysis,
historical review, stress testing, etc. The criteria for determining KIRB are more defined (e.g.,bottom-up wholesale analysis, segmentation of retail exposures) and more difficult forinvestors to achieve.
National regulators in some jurisdictions have met with banks that use the SFA in order todiscuss the possibility of broadening use of the SFA for both banking book and trading book
exposures. These discussions included potential barriers which might include data
availability, modelling, etc.
Major banks generally can and do apply the SFA in most cases where they originate orservice the underlying exposures, since they have the data and have developed models to
calculate KIRB for these assets. Examples include servicer cash advances for private label
securitisation programs, synthetic securitisations that are used to transfer risk of wholesale
and retail assets held on balance sheet, and retained tranches from securitisation programs
11

BCBS, Enhancements to the Basel II framework (July 2009) (BCBS 157), pages 5-6, adding Basel IIparagraphs 565(i)-(iv), available at http://www.bis.org/publ/bcbs157.pdf.

7which those banks originated. On the other hand, in many cases, banks are unable to run the
SFA when they act in the role of investor. This is due to challenges in obtaining andmodelling the underlying exposures in accordance with the rigorous standards fordetermining KIRB. These include standards for data acquisition and storage, model validation,
back-testing, etc.
Regarding data acquisition, for some asset classes (such as US RMBS), a bank may be able
systematically to obtain data from outside sources if the bank invests in the required
infrastructure. For other asset classes, originators may not be able to provide the level of
granular data needed to calculate KIRB. Examples include many credit card, auto and CLO
deals. Enhanced disclosure standards already put in place (such as the loan level datarequirements of the European Central Bank and the Bank of England) and other initiatives
may go some way to address this, but these disclosure data requirements have been designed
primarily to assist investors in making credit judgements and may not align with what isneeded to calculate KIRB (e.g., granularity and/or specific data elements used in factor
models). Any new disclosure standards or initiatives would also be difficult to apply
retrospectively to existing transactions. Such disclosure standards also raise data protection
and privacy law implications which vary in different jurisdictions.
Assuming that the data could be obtained, a bank would then need to model probability ofdefault (PD), LGD, etc. For retail exposures, it is possible that a bank could utilise an
existing model that it applies to its retail portfolio. This could work, for example, for US
retail mortgages (in which many US banks have portfolio holdings), but the model might not
be appropriate for application to non-US mortgages. In the case of most banks, asset classes
and jurisdictions, even a bank that applies the IRB to asset portfolios it originates or services
in its home jurisdiction may not have supervisory permission or be able to meet the strict
operating conditions to apply the IRB to portfolios of similar assets originated by other banks
or in other jurisdictions.
For wholesale exposures (such as CLOs and commercial mortgage-backed securities(CMBS)), our understanding is that banks would need to determine PD (based on internalratings) and LGD for each underlying exposure. In addition to facing challenges in obtaining
detailed data for each underlying exposure, it is difficult for a bank to assign internal ratings
to exposures which it does not originate or service. In applying their own IRB models,originators generally use expert judgment based on in-depth knowledge of and insights on
their clients, something an investor generally lacks. For some portfolios, investors
furthermore lack internal loss history and may not be able to use or have full access to theoriginator data.
We believe that banks modelling PDs, LGDs etc. as investors would need to use a large
number of different models in order to cover the broad range of assets types and transaction
structures. While this observation applies to both wholesale and retail exposures, banks
would need even more models for wholesale exposures than for retail, due to the requirement
to use a "bottom-up" approach of determining inputs for each exposure.
Banks will have to consider the cost and practicality of applying any particular approach inmaking investment decisions. Applying IRBA would likely require significant investment indata and modelling infrastructure. For some asset classes, such as senior credit card and auto
securitisation exposures, it might be more effective to invest in "agency" RMBS or equivalent
exposures given the comparable level of risk and returns.

8Because of differences in asset and transaction types, market practices and availability of data
in different countries, it would not be practical or desirable for the Committee to specify indetail all the specific methods banks may be able to use to calculate KIRB in order to apply the
IRBA. However, provided the IRBA calibration is properly aligned in relation to the otherapproaches, we recommend the revised framework include wording to the effect that bankregulatory supervisors should work with banks in their jurisdictions to develop flexible
approaches in order to encourage a wide application of the IRBA while maintaining the
integrity and effectiveness of the model. At the same time, it should also be made clear thatbanks with IRB approvals may use the ERBA or IAA (where allowed) or the SA in cases
where there is not sufficient data available to support IRBA application or development of thenecessary models would be unreasonably burdensome.
Application to mixed pools – 1250% risk weight
We welcome that the new proposal allows for transactions to use the IRBA for mixed poolsof IRB and SA assets. However, the need to apply the risk weight of 1250% to the SA assets
adds a severe level of conservatism even for transactions which almost solely consist of
IRBA assets. To avoid this, we propose to allow banks to use risk weights from the generalstandardised approach for these assets up to a threshold of 5% of the nominal value of
securitised exposures in the transaction, and only then apply the risk weight of 1250% to any
non-IRB assets which surpass this amount.
Maturity adjustment
The proposed definition of maturity, based on contractual maturity of the relevant
securitisation tranche, is only distantly related to the expected time to repayment of the
securitisation exposure. By way of example, in the comment letter on BCBS 236 submitted
by a group of independent vehicle and equipment finance companies,12 one comment pointed
out the effect of the use of final maturity date rather than WAL: A AAA-rated auto ABS
bond with a five year maturity would typically have a WAL of 2.5 years based on thecontractual payments and, with prepayments, would have an even shorter WAL.
Nonetheless, the AAA-rated ABS bond would in some cases have a higher capitalrequirement than an unsecured exposure to a lower-rated corporate entity that really would beoutstanding for five years.
Allow use of published WAL tables where available
We understand that the Committee wishes to avoid opportunities for regulatory arbitrage orinconsistent treatment that could result from banks using their own assumptions and models
to calculate WAL. We believe, however, that banks should be allowed to rely on the
published WAL tables which are included in ABS prospectuses. Such tables are reviewed byaccountants according to agreed-upon procedures to help achieve consistency of approachacross different issuers and transactions. Reference to the published WAL tables would also
help different banks investing in the same transactions to determine consistent maturity
values based on the same WAL calculations.

12

Letter (29 March 2013), available at http://www.bis.org/publ/bcbs236/viwg.pdf, pages 9-10.

9Allow use of WAL based on specified assumptions
For cases where published WAL tables are not available, we ask the Committee to allowbanks to calculate WAL using specified, conservative assumptions of prepayment rates
according to asset class. As a starting point, we propose the following for consideration
based on research by some of our members:13
Asset typePrepayment assumption

US Auto loans

1.2% Absolute prepayment speed (APS)

European auto loans

7% APS

Auto leases

0.75% APS%

Personal/unsecured loans

5% APS

Private credit student loan

4% Conditional prepayment rate (CPR)

FFELP student loan

6.5% CPR

Equipment finance – heavy

5% CPR

Equipment finance – light

10% CPR

CMBS

0% (bullet maturity)

US + Canada RMBS

5% CPR

Dutch RMBS

5% CPR/early call date14

UK RMBS

10% CPR

If a bank's internal policies required use of a lower assumed prepayment rate, it would usethat lower internal rate in place of the supervisory input.
Limit M based on contractual maturity of underlying exposures
Alternatively, the definition of maturity should be based on (and not longer than) the
weighted average contractual maturity of the underlying securitised exposures, rather than of
the securitisation tranche. For example, in the case of a static pool where the underlying
financial assets have contractually fixed cash flows (e.g., amortising loans), banks could map
those contractual cash flows (both scheduled instalments and final maturity) to thesecuritisation tranches in order of priority, and, in the case of time-tranched securities, for13

14

Certain of these figures are based on research reported in J.P.Morgan, Asset-Backed Securities –Securitized Products Weekly (31 January 2014 and 14 March 2014). Others are from unpublished internal
research by our members. Further details can be provided on request.
Early call date is for structures which include a substantial increase in pricing if tranche is not called on theearly call date.

10

each tranche, using the most conservative assumption as to order of payment. Again, we
understand the Committee is concerned about model risk and inconsistent results from theuse of cash flow models. For most transactions, however, this exercise would involve a fairly
straightforward mapping of contractual cash flows to tranches in order of seniority.
For purposes of the maturity calculation based on maturity or weighted average life of theunderlying pool, whether or not taking into account expected prepayments, we propose thatthe default rate should be assumed to be zero. For senior tranches, defaults on the underlying
exposures normally will not affect the time of payment of the securitisation exposure, andmay actually result in faster reduction of the tranche principal amount (by application of
enforcement recovery proceeds or credit enhancement). Even for junior tranches, wheredefaults may mean part of the securitisation exposure would be written off rather than paid,defaults before maturity would reduce the time during which the tranche principal remains
outstanding.
Maturity of replenishing transactions should reflect contractual limits
The proposed maturity treatment of replenishing pools results in a striking difference incapital requirements before and after securitisation. If a bank holds a pool of loans with aweighted average maturity of, say, three years, it will hold capital against that pool based on
the weighted average maturity or average life of those loans. If it then buys credit protection
for a subordinated or mezzanine tranche of the pool, and calculates its capital requirement
under the securitisation framework as proposed, it will have to assume the maturity of its
securitisation exposures equals the sum of the replenishment period (during which it may addloans to the securitised pool) and the longest permitted maturity (say five years) of any
securitised loan. The credit protection which reduces the bank's overall exposure to credit
risk of the underlying exposures will thus increase the bank's related capital requirement.
Typically, a replenishing securitisation transaction includes contractual provisions thatterminate or allow investors to require termination of the replenishing period on occurrenceof any one of several portfolio performance triggers that show the portfolio is not performing
as expected. In those circumstances, the replenishment period does not add to the risk
horizon of the securitisation exposure and should not be counted at all. Exposure totransactions that include such early termination triggers should be treated the same as fixedpools.
Even without giving effect to early termination provisions, rather than adding to thereplenishment period the longest possible maturity of any asset added to the pool during thereplenishment phase, banks should be allowed to take into account contractual safeguards
such as limits on the weighted average contractual maturity of the replenished pool. For
example, if the securitisation contracts require that, upon any addition of receivables to thesecuritised pool, the maturity of any receivable so added must not exceed three years, andafter adding the new receivables the weighted average maturity of all the securitised
receivables must not exceed two years, then, for senior tranches, maturity of the securitisation
exposure should equal the sum of two years, rather than three years, plus the remaining
replenishment period.
Maturity of synthetic securitisation tranches
Maturity of the securitisation tranche should, however, be taken into account in the case ofsynthetic securitisation, particularly for the credit protection provider. To the extent that the11contractual maturity of the credit protection is less than that of the protected exposures, it
should be treated as the outer limit of the maturity adjustment for the resulting securitisation
exposure.
Parameter p in IRBA
This comment responds to Question 2 in the Consultative Document.
The Committee should consider more granular asset classes to derive p. The hypothetical
portfolios the Committee have used are not granular enough to strike the appropriate balance
between simplicity and risk sensitivity. As proposed, IRBA is not risk-sensitive enough andwould penalise a wide variety of asset classes and transaction types, which could havedeleterious impacts to commercial and consumer lending and the broader economy. In
addition, the model and calibration should be made more transparent, and the calibration
should be based on actual transactions and empirical data rather than stylised, hypotheticaltransactions.
As previously discussed with the Committee, some of our members have developed analternative model, the Arbitrage Free Approach (AFA), based on the principles of objective
statistical basis, capital neutrality (except for transparent model risk charges), regulatory
control and transparency. The AFA working group (or "Quant group") has also developed asimplified version of the AFA (SAFA), designed to permit investors to use the formula, byreplacing direct estimates of maturity and LGD with representative values for regulatory asset
classes. Responding to regulators' preference for a capital distribution that is monotonic as toseniority (that is, in which more junior tranches always have higher risk weights than moresenior tranches), and modifying the SAFA to include expected losses (that is, to base capitalon the tranche modified value at risk (MVaR) rather than UL), the Quant group has
developed a "Conservative Monotone Approach" (CMA).15 Since the simplified supervisory
formula approach (SSFA) is not a risk model but a capital allocation function, we understandthat the BCBS 269 calibration is derived from the outputs of the revised modified supervisory
formula approach (MSFA). The CMA may be considered as a basis for better calibration of
the SSFA which underlies both the IRBA and the SA.
As an alternative to the CMA, the Quant group has developed a modified version of the
SSFA, known as the Modified SSFA (MSSFA), which uses two different p variables toprovide more risk sensitivity while reducing opportunities for arbitrage and solving otherissues related to the delinquency factor (w).
The Quant group has also developed a proposed calibration of the CMA, MSSFA and SSFA
using a transparent calibration methodology for different regulatory asset classes, for use with
the Standardised or IRB Approach. Annex 6 (Transparent Calibration Methodology per
Asset Classes – CMA – Standardised Approach) shows the latest version of the proposed
calibration. Annex 7 (Calibration under the Standardised Approach) shows comparative
securitisation capital surcharges for different regulatory asset classes, for senior and for nonsenior tranches, under the CMA, the MSSFA and the SSFA, alongside the capital surcharge
under the proposed SA (100% for all asset classes).

15

G. Duponcheele, W. Perraudin & D. Totouom-Tangho, Reducing the Reliance of Securitisation Capital on
AgencyRatings(3
February2014),
availableat
http://www.riskcontrollimited.com/public/Reducing_the_Reliance.pdf.

12

The examples shown in Annex 5 (Securitization Capital Analysis), discussed above, andother examples discussed in this letter demonstrate the need for a granular approach tocalibration. The Quant group's work demonstrates the value and feasibility of calibrating thecredit risk model by asset class. We believe that the accuracy and risk sensitivity of theresults can be improved still further by calibrating not according to the regulatory asset types
but according to common securitisation asset types.
We believe that the regulatory categories used in the existing Basel framework are notadequate for this purpose, as there are great differences between different asset types within,for example, the wide wholesale and retail categories. In addition, the regulatory categories
are different for banks using the IRB approach and the standardised approach, whereas theCommittee should use data on the same asset classes from both large and small banks to get
the largest possible sample.
Accordingly, we request that the Committee ask national supervisors to ask banks to add a
new column to their responses to the current QIS, in order to specify the asset class of theirtransactions according to categories like those listed below. This would provide theCommittee with ample empirical data it could use as basis for calibration by asset class.
Though this list is not definitive, we propose the following categories for consideration:












Credit card receivables
Retail auto finance (loans and/or leases)
Collateralised loan obligations (CLOs)
Trade receivables
Equipment and inventory finance (including auto fleet and dealer finance)
Student loans – FFELP (or other government-guaranteed)
Student loans – private
RMBS (with sub-categories recourse and non-recourse)
CMBS (with subcategories single borrower/single credit (SBSC) and conduit)
SME finance
Other

Limit maximum p and reduce minimum p
The supervisory parameter p in the IRBA formula serves as an add-on factor that forces total
capital across the structure to be higher after securitisation than when the underlying assets
are held directly by the bank before securitisation. We understand this is intended to take
into account model risk in the securitisation process and the resulting uncertainty in risk
attribution across different tranches. The proposed formulation for p is based on a number of
inputs and has a floor of 30%, implying that total capital across the structure after
securitisation will be at least 30% higher than before. However, the current formulation isunbounded on the high end, and certain combinations of parameters can result in this factor
being greater than 100%, effectively more than doubling the capital.
First, we believe that a proper calibration would justify a floor at 20% rather than 30%.
Second, we propose that the supervisory p parameter within the IRBA formula be capped, forsenior securitisation tranches, at 60%, and for non-senior tranches, at 90%. This formulation
would still ensure capital after securitisation would be at least 20% higher and up to 60%
higher than capital before securitisation. The proposed lower floor and senior and non-senior13

caps are consistent with the results of CMA recalibration of the SSFA, summarised in
Annex 8 (Calibration of the SSFA with one parameter), in which the lowest p value is 0.21
and the maximum p is 0.58 for senior tranches and 0.89 for non-senior tranches.
As a result the revised formulation for the supervisory parameter p would be (for seniortranches):
P=min[0.6;max[0.2;(A+B*(1/N)+C*KIRB+D*LGD+E*MT)]]For non-senior tranches the formulation would be the same except 0.9 would replace 0.6.
The approach of capping the p parameter is appropriate for the following reasons:•conceptually, senior tranches should not have more capital than the underlying
pool, but, though we know the Committee is not comfortable with capitalneutrality, a reasonable cap should be acceptable;•

the approach is simple;•

the proposed p parameter already includes a floor, so it is not inconsistent to add acap; the notion is also consistent with other cap features in the proposal;•

it addresses concerns in terms of model risk;•

it results in post-securitisation capital higher than the capital associated with theunderlying assets for all tranches.

Treatment of certain non-granular transactions
Particular difficulties arise in relation to the granularity parameter where CMBS is concerned.
The underlying asset class of commercial real estate (CRE) differs from those underpinning
other forms of securitisation in that individual assets are highly heterogeneous and individual
assets (and loans) can be very large. Furthermore, risk diversification can also be achieved at
the level of tenancies rather than at the level of assets or loans: a single shopping centre may
be financed with a single loan, but the credit exposure may be diversified across 100 different
tenants. A statistical approach to assessing and managing risk based on high granularity is
not always the most appropriate way of approaching CMBS.
While assembling commercial real estate asset portfolios large enough to be susceptible tostatistical analysis is indeed one valid approach, another is to securitise exposure to a verysmall number of assets, borrowers and loans – potentially a single large asset, or a small
portfolio of assets, and just one borrower. It is then possible to carry out rigorous assetspecific due diligence, rather than adopting the more financial or sample-based approachrequired for large portfolios.
These features of commercial real estate should be recognised in the risk calculation andcapital treatment of CMBS. A CMBS exposure with a single large and complex asset such asa shopping centre or office development (where "N" is 1) may present a lower risk (and may
be easier to assess as a risk) than a CMBS exposure with 30 large and complex commercial
properties, despite the apparent concentration of risk and lack of granularity. The true
counterparty risk will in any event depend on the underlying tenants, rather than on thenumber of borrowers. Unfortunately, the proposed approach to calculating p does not allow
14

for that, automatically penalising exposures where N is small. CMBS pose another exampleof the need for separate calibration according to asset class.
In considering (and calibrating for) CMBS, it is important to distinguish between SBSC and"conduit" transactions. SBSC transactions are backed by a single commercial real estate
mortgage loan or by several mortgage loans related to a single property or a group of
homogenous properties with one borrower. All the loans are cross-collateralised, and thus
the cash flows from one loan can be used to support the obligations related to the other loans.
Since 1997, these transactions have performed extraordinarily well, with only 0.25% of
cumulative losses over this period, mostly concentrated in a single deal. Based on theircharacteristics and performance, the CRE Finance Council has recommended to US federalbank regulators that SBSC transactions that meet certain criteria – cross-collateralisation ofloans, $200 million or larger, and adherence to a rigorous disclosure regime – be given
tailored treatment under the US credit risk retention framework.16
ERBA calibration and application
Calibration generally
After the calibration of the IRBA and SA are refined as proposed elsewhere in this letter, thecalibration of the ERBA will need to be revisited in order to achieve a better alignment of its
results in relation to IRBA (which should generally produce lower rather than higher risk
weights than ERBA) and in relation to SA (with which it should be broadly aligned). We
recognise that an appropriate and consistent alignment of resulting capital requirements
between the different approaches has been very difficult to achieve due to the differences intheir formulation and the types of inputs. However, we believe this aspect can be much
improved by approaching calibration according to asset classes.
Differentiate between CC and lower rated senior tranches within the ERBA
Currently, all exposures rated below CCC- are to be assigned a 1250% risk weight. This is a
penal approach, as it implicitly assumes that these positions suffer 100% PD and 100% LGD.
The GFMA response to the prior consultation therefore requested lower risk weights forsenior tranches (only) rated below CCC. We understand that the Committee may facepractical issues in implementing such an approach for assets rated D, as this would require a
process to ensure that any expected losses had been separately identified and deducted from
capital.
We therefore propose a simplified approach that retains the 1250% risk weighting for
exposures rated C or D. But senior exposures rated CC would receive an 850% risk weight(subject to the overall recalibration of the ERBA), reflecting their materially lower risk asoutlined in Annex 9 (Risk-weighting of lower-rated tranches). Such an approach would
further the Committee's goals of reducing cliff effects in addition to aligning capital to risk.

16

CRE Finance Council, letter to heads of US Federal banking regulatory authorities re: Single BorrowerSingle Credit Qualified Commercial Real Estate Eligibility (28 February 2014), available at
http://www.federalreserve.gov/SECRS/2014/March/20140314/R-1411/R1411_022814_112060_334350278974_1.pdf.

15

Inferred ratings for interest rate and currency hedges
Securitisation structures often require derivative solutions to risk manage mismatch between
assets and liabilities. To infer a rating, the framework looks to the rating of the most senior
position that is subordinated to the swap position (so, in a typical transaction, an interest rate
or currency swap that ranks pari passu with Class A notes will have a risk weighting based on
the Class B notes). We think this makes no sense from a credit risk perspective and, as, suchfrom credit risk capital requirements perspective. We recommend that the Committee
consider allowing inferred ratings from notes rated either pari passu with or junior to thederivative.
IAA application
IAA and IRB approvalWith reference to the statements in the CD on IAA application,17 though only banks withsome IRB approval can use the IAA, and the proposed rules text18 is similar to wording in the
Basel II rules,19 the details of when and how IAA can be applied to particular transactions
and their relation to specific IRB approvals and operating conditions have been and, we
expect, will remain matters on which banks need to consult their national supervisors. We
wish to confirm our understanding that neither the CD nor the revised rules are intended tochange existing rules and practices in this regard.
Extend IAA to certain bank-funded transactions
The IAA was originally designed to provide an appropriate method for banks to determine
capital requirements for securitisation exposures held by banks acting as sponsors of ABCP
conduits and providing liquidity facilities and programme credit enhancement facilities, andperhaps interest rate and currency exchange rate hedges or other unrated exposures, to those
conduits. Through its exposures to the conduit, a bank sponsor becomes exposed to the credit
risk of the securitisation transactions entered into by the conduit with the bank's customers.
ABCP conduit sponsor banks have found the IAA to be a useful, appropriate and risksensitive method of calculating their capital requirements for such transactions. The IAA,
like the SFA or IRBA, also requires a great deal of detailed information and analysis and issubject to a high level of regulatory supervision.
Banks, whether or not they sponsor ABCP conduits, often enter into securitisationtransactions with their customers that are identical to those typically entered into by ABCP
conduits, except that funding is provided by the bank directly rather than by the conduit
issuing ABCP supported by bank facilities. It is increasingly common for a receivables
securitisation facility to be provided by a lender group consisting of one or more ABCP
conduits, supported by their sponsor banks, and one or more banks providing funds directly.
It is anomalous that, in those cases, the ABCP sponsor banks may use the IAA to determine
their capital requirements while the other banks, having essentially the same exposure(though funded rather than unfunded), may not. We believe that banks that develop thenecessary models and obtain supervisory permission should be permitted to apply the IAA to

17
18
19

CD page 9.
CD page 30, paragraph 46.
BCBS 128 paragraphs 607, 609.

16

unrated securitisation exposures in appropriate conditions whether or not it funds those
exposures through an ABCP conduit.
Of course, the IAA operating conditions, developed for exposures to ABCP conduits, willneed to be adapted to apply to exposures not held through conduits. Annex 10 (Proposedchanges to IAA provisions) sets out our proposed changes to paragraphs 46 and 66 through 69
of the proposed framework text.
Standardised approach (SA) – operative conditions and calibration
SA adds too much conservatism to already conservative underlying capital requirements
We appreciate that the SA is designed to be relatively simple, so that it can be applied bysmaller as well as larger banks, including those acting as investors as well as originators orsponsors, to a wide range of assets and transactions. However, a comparison of its resultswith those of ERBA shows that the capital requirements it produces will be excessive. Thisflawed calibration will be most disadvantageous to banks in jurisdictions where they will not
be allowed to use the ERBA, and will create a highly unlevel playing field between
jurisdictions. The SA's calibration should be adjusted to reflect the high credit quality of
most securitisation transactions and to take into account the conservatism already built into
SA capital requirements for the underlying asset pools. Since those capital requirements arethemselves relatively risk-insensitive and so are calibrated on a conservative basis, any
further addition of capital for the related securitisation exposures should be limited to areasonable and transparent adjustment for securitisation model risk.
The use of a delinquency adjustment within the SA appears to double up on the capital on theunderlying pool. Because KSA is less risk-sensitive than KIRB, it is calibrated conservatively
to cover a wide range of credit quality including the possibility of a high proportion ofdelinquent receivables. The resulting risk weight should not have to be further increased toaccount for delinquencies that the capital requirement is already sized to cover.
SA needs to distinguish between asset and transaction types
In addition, though we recognise the advantages of simplicity, a "one size fits all" approach is
not suitable for the wide range of assets subject to securitisation. In order to provide forcapital requirements that are appropriate for securitisations of different classes of assets, itwill be necessary to make some distinctions between different asset classes andcharacteristics of transactions.
In the SA, the increase in p from 0.5 (in the US) to 1.0 most severely affects prime retailsecuritisations. The attachment points tend to be lower for these securitisations to reflect thehigher credit quality of the borrowers. The resulting increased capital requirements would
make many of the current market structures uneconomic and could either reduce lending or
increase the cost for borrowers, particularly to retail borrowers.
One example showing the need for a more differentiated approach is a comparison of
cumulative losses for securitisations by different vintages across different asset classes.
Annex 11 (Collateral Cumulative Loss by Vintage (US)), using data from Intex and otherpublic sources, represents cumulative losses over time for all securitisations originated in the
US market only. It shows that 2007 non-prime securitisations performed markedly worse
than others, while most asset classes of most vintages performed remarkably well. Though17we can appreciate regulators' concern that other asset classes that have performed well
historically may perform worse in future, this graph illustrates the need for somedifferentiation between asset classes.
As discussed above, we advocate a recalibration of the SSFA formula according to asset
classes, for both the IRBA and SA applications. The Quant group work shows how this canbe done, and securitisation data sorted by asset class categories like those we listed above
would provide the basis for recalibration.
Derivative contracts other than credit derivatives
The following comments respond to the Committee's Question 1 in the Consultative
Document.
Ease treatment of counterparty risk in the calculation of KIRB for eligible counterparties
Paragraph 50 of the proposed rules text defines counterparty risk to be considered whencalculating KIRB. This also includes assets in which the securitisation special purpose entity(SPE) may have invested (such as reserve accounts or cash collateral) as well as claims
against counterparties resulting from interest rate or currency swaps. Though we
acknowledge that such assets also contribute to pool RWA and KIRB, our analysis showedthat the actual impact on KIRB and subsequently the tranche risk weights is only minor,
particularly for transactions that have, as is typical, minimum counterparty eligibility
requirements and provisions designed to protect against counterparty credit deterioration.
However, the ongoing inclusion of those positions in the calculation of KIRB would requireconsiderable effort, in particular to calculate the fluctuating exposure from embedded interest
rate or currency swaps. Hence, the proposed rule would impose a significant administrative
burden on banks while yielding only a negligible increase in risk sensitivity.
We therefore propose to define qualitative criteria and additional safeguards which justify
that those assets do not need to be considered when calculating KIRB. From our experience,
appropriate counterparty criteria should be based on initial minimum requirements and aprocess which takes effect in the case of adverse transition. Initially, the following should be
fulfilled for a counterparty to be deemed eligible:
Counterparty fulfils the requirements of an eligible guarantor under the framework as
implemented in the relevant jurisdiction; andClaims are not subordinated.

Safeguards in the case of loss of eligibility could be the following:Transfer of cash collateral to eligible deposit bank (reserve accounts, cash collateral);Transfer of obligations to eligible counterparty (interest rate or currency swap); orCounterparty provides collateral to the SPE (interest rate or currency swap).

18

Proxy calculation of counterparty risk
Our members noted that the CD proposal on derivatives contracts was clarified in the QIS
instructions20 to use a method more consistent with capital charges on swaps. However, there
is still the practical issue that in most cases, banks, particularly when acting as investors,
would not have access to all the information needed to calculate the PV of future swap
payments to the issuer in order to derive the swap capital charge. This means that both the
IRBA and the SA cannot be used. In view of this practical issue, the Committee should
approve one or more alternative methods to take into account the swap capital charge.
Besides excluding eligible counterparties from the requirement to add capital for embedded
swaps, we propose that the revised framework allow banks to use a proxy calculation for the
PV of plain vanilla currency and interest rate swaps. The data required to calculate the proxy
PV can usually be accessed through different sources available to investors, such as theoffering circular, periodic reports and widely used valuation models such as Intex. The proxycalculation would be as follows:

For a floating/floating currency swap: PV equals notional amount times (one minus
the current foreign exchange rate divided by the foreign exchange rate at inception).



For a fixed/floating or floating/floating interest rate swap: PV equals notional amounttimes WAL times (current interest rate minus initial swap rate).

Floors and caps
Risk weight floor should be lower for senior exposures
We appreciate the Committee's lowering the proposed risk weight floor from 20% in the first
consultation to 15% in the CD. We believe that a lower floor of 10% is justified.
We agree that model risks need to be addressed, and the use of inputs such as PDs and LGDs,
and RWAs in multilayered models, which may be inconsistent or over-simplified, may bring
uncertainty in the estimate of UL at the tail of the capital structure (i.e. senior tranches) andthus may justify a floor. However, we think that applying a floor of 15% risk weight
introduces a buffer that is too punitive for the senior tranches.
For most asset classes, there has been so far no loss at all on the senior tranches, including
during the recent crisis (e.g. good quality European RMBS, consumer loans, tradereceivables, and others). This is explained by the protection of the senior tranches which has
been resilient even in the downturn.
During the year that has passed since the first consultation, the industry has done further workon the analysis and calibration of credit risk in securitisation transactions based on empirical
data. These include the analytical work done by the Quant group and discussed in their
published papers. With the recent developments of models such as the CMA, which provide
a more comprehensive and consistent approach to capital for securitised portfolio, we believethat the model risk has been decreased, especially with additional layers of conservatism
included in these models.
20

BCBS, Instructions for the Quantitative Impact Study on the Revisions to the Basel Securitisation
Framework (3 February 2014), pages 21-22, paragraph (vi).

19Annex 12 (CMA with scenarios of parameters on sample of transactions) shows results ofapplication of the CMA to a selection of sample transactions. Results of stress scenarioschanging inputs and parameters of these models show that in some asset classes, the MVaR
would still not reach the proposed 15% floor for some of the asset classes (good quality
RMBS, SME, consumer loans, trade receivables in our sample).
Capital requirements cap should be available to SA banks acting as investors
The capital requirements cap should be allowed for all banks holding securitisation positions,
whether as sponsors, originators or investors. We understand the Committee's view is thatthe cap should apply only where the investor has access to the underlying loan informationand is able to calculate KIRB. That explanation would imply that all originators and sponsors
will use IRBA and be able to calculate KIRB, and that is not the case. There will bestandardised banks that sponsor and originate and will therefore use the SA rather than IRBA.
If all sponsors and originators were able to calculate KIRB, as the cap provision would imply,
there would be no need to extend the capital requirements cap to banks applying the SA.
Investor banks that cannot apply the IRB to the underlying exposures should be allowed to
calculate and apply the capital requirements cap on the basis of the SA capital requirements
for the underlying exposures.
Capital requirements cap should be proportional to bank's largest holding of any trancheThis comment responds to the Committee's Question 3 in the Consultative Document.
As noted in GFMA's comment letter on the prior consultation,21 in order to meet originatorrisk retention requirements in effect in the EU and pending in the United States, an originatormay retain a "vertical slice" consisting of a rateable share (of at least 5%) of each tranche
offered to investors in the securitisation. For example, if the capital structure includes asenior tranche, a mezzanine tranche and a junior tranche, the originator would retain 5% ofeach of the three tranches. In that case, the originator's exposure to credit risk of the pool
exposures would be the same as if (under another permitted form of risk retention), instead ofretaining those tranches, it had retained an equal amount of randomly selected pool exposuressimilar to those in the securitised pool. The originator's maximum capital requirement should
equal the same percentage share (5%) of the capital requirement that would apply if the pool
exposures had not been securitised.
The same principle of proportionality should apply to the originator's (or a sponsor's orinvestor's) holding of any tranche or tranches of a securitisation: Subject to our comment
below on vertical slice retention, the cap should be proportional to the largest portion of any
tranche held by the bank. In the above example, if the originator, rather than retaining a 5%
vertical slice, retained half of each of the mezzanine and junior tranches (or half of themezzanine tranche and one-fifth of the junior tranche), its capital requirement should notexceed half of the capital requirement that would apply if it retained the whole pool of
exposures. If an investor bought 10% of only the senior tranche, its capital requirement
should not exceed 10% of the capital requirement of the unsecuritised pool.
This proportional application is particularly appropriate and necessary in order for banks
acting as investors in securitisations to get any benefit from the cap. We do not see any
reason to think this application would not be prudent or that it would give rise to
21

GFMA 2013 page 37.

20

opportunities for regulatory arbitrage. We would be happy to discuss with the Committee
any specific concerns they may have on this point.
Further limit capital requirements to retained vertical slice
Members also propose that, for an originator retaining a net economic interest in the
securitisation in the form of a vertical slice (either a minimum percentage of each tranche of
securities issued or a corresponding percentage of each securitised exposure or of randomly
selected exposures similar to the exposures transferred in the securitisation), the originator's
aggregate capital requirement for its retained tranches or exposures should not be greater thanthe capital charge of the underlying pool multiplied by the percentage of net economic
interest retained by the originator. That percentage would be calculated as the RWA of thetranches or exposures or portions of tranches or exposures retained by the originator divided
by the total RWA of all the securitisation tranches and retained exposures after the
securitisation. Annex 13 (Capital requirements cap based on retained economic interest)
sets out in more detail the rationale for this treatment, with numerical examples.
While these examples refer to cases where a vertical slice is retained to comply withapplicable retention rules, the same treatment should apply to a retained vertical slice
regardless of whether it relates to a regulatory requirement. If the bank retains a vertical slice
while also holding a larger portion of certain tranches, this treatment should apply to thevertical slice portion, and the capital requirement for the incremental portions would be
calculated separately and added to that calculated for the vertical slice.
Overlapping facilities in ABCP conduits
This issue is relevant for banks that provide both liquidity facilities and programme-wide
credit enhancement facilities to ABCP conduits. Banks that currently utilise either the IAA
or the SFA assign a risk-weight to the backstop liquidity commitment supporting thesecuritisation exposure in a manner that (1) treats the bank as if it owned the underlying
securitisation exposure held by the conduit (that is, there is no conversion factor to reduce therisk weights below direct ownership), and (2) does not recognise the benefit of structuralprotections afforded to liquidity providers (such as the requirement not to fund defaulted
receivables).
In essence, the capital assigned to the liquidity facility is at least as conservative as the capitalthat is assigned to funding the exposure directly on the bank's balance sheet. The current
proposal requires that banks capitalise the programme-wide credit enhancement as aresecuritisation exposure (even though, in structures that use programme-wide credit
enhancement, the sum of the backstop liquidity facilities and programme-wide credit
enhancement exceeds 100% of the ABCP conduit liabilities). As a result, the total regulatory
capital associated with the liquidity facilities and programme-wide credit enhancement
facility supporting the ABCP conduit far exceeds the regulatory capital that the bank would
be required to hold if it simply guaranteed every asset funded by the ABCP conduit.
The impact of this resecuritisation approach is an excessive and inconsistent regulatory
capital requirement when compared to the regulatory capital that would be required for theliquidity facilities alone (which are treated as if the bank held the conduit's securitisation
directly on its balance sheet). We therefore recommend that the Committee make it clear
that, when a bank provides more than 100% committed facilities in support of an eligible
ABCP conduit, its total capital requirement for those facilities (regardless of the approach21

used to determine it) will not exceed the amount it would be required to hold if it fully
guaranteed each of the underlying securitisation exposures held by the ABCP conduit.
Annex 14 (Illustration of Program Wide Credit Enhancement Treated as Resecuritization)
illustrates the recommended treatment with a sample calculation.
Resecuritisation
There is broad agreement that the retranching of a single ABS should not be considered aresecuritisation. Though we appreciate the Committee's effort to clarify this point, theindustry is still concerned that the current draft wording can be interpreted in multiple ways.
There are also questions regarding the interaction of the resecuritisation provisions withproducts such as CMBS and transactions such as repackagings of Japanese RMBS.
The main concerns are:

The definition of "pool"Transactions that aggregate ABS without correlation assumptions between them.

"Directness" and the need for repackaging SPEs.

There is also a "double counting" situation referred to above in relation to ABCP, which isless of a resecuritisation question and more about a need to clarify the operation of the capitalrequirements cap and the provisions on overlapping facilities.
For ease of reference, the CD statement on resecuritisation is as follows (underlining added)22"The previous consultation revealed some uncertainty within the industry regarding
the scope of resecuritisation as defined in Basel 2.5. The Committee clarifies that an
exposure is considered a resecuritisation exposure if its cash flows depend on theperformance of a pool of assets that contains one or more securitisation exposures.
For example, exposures resulting from retranching are not resecuritisation exposures
if, after retranching, they act like a direct tranching of a pool with no securitised
assets. Here retranching does not increase correlation risk, which was the rationale forassigning higher risk weights to resecuritisation exposures."
The meaning of "pool"
There is uncertainty regarding whether a single ABS is a "pool" for this purpose. If it is not apool, then the current wording works as intended. But if it is considered to be a pool, then thewording does not achieve its desired aim.
Unfortunately the proposed rules text is not helpful in this respect, as it includes the statement(in paragraph 6) that "The underlying pool may include one or more exposures." 23 This isnecessary in the context of that section, as it ensures that the retranching of a single loan
should be considered to be a regular securitisation. But some observers have "read across"the concept that a pool can be comprised of a single obligation into the resecuritisation
section. They therefore believe that a single ABS may constitute a pool, and that any
2223

CD page 19. This statement relates to securitisations generally and appears in BCBS 128 paragraph 542.
CD page 21.

22retranching of it is therefore a resecuritisation. Under this interpretation, the example in the
CD wording contradicts the general rule in the preceding sentence.
Transactions that aggregate ABS without correlation assumptions between themSome structures simply aggregate exposures to a number of underlying ABS. This is
typically done when the underlying ABS are of sub-optimal size. Examples include ABCP
programmes (which are typically secured on a portfolio of separate ABS exposures), many
CMBS structures (as the property loans securing a CMBS may technically count as ABS if
they are tranched), and various RMBS transactions in Japan which repackage bonds issued bysmaller banks.
RMBS 1Aggregate Deal

80

20
160

RMBS 280

2040

In a typical repackaging structure, the rating agencies simply look through to the underlying
ABS, and calculate the tranching that each one can support. The debt issued by therepackaging programme is just the sum of the parts – no credit is given for the diversification
between the various ABS. When a transaction is analysed in that fashion (whether by arating agency or by a bank utilising the IRBA or the SA), there is no increase in correlation
risk. These structures should not be considered resecuritisations simply because they
aggregate cashflows.
"Directness" and the need for repackaging SPEs or trusts
Most retranchings are conducted in the secondary market after a transaction has closed. The
underlying ABS is held in an SPE or trust that issues the new retranched securities. Thus
almost by their definition, the new security is an "indirect" tranching rather than a "direct"
tranching of a pool with no securitised assets. A similar problem exists in ABCP
programmes where a series of SPEs (typically one for each client transaction) are funded byan aggregation SPE that issues ABCP in the market. Features such as liquidity facilities andswaps may exist at either the underlying transaction SPE or the aggregation vehicle.

23

ABS

Retranching SPV

Underlying
Collateral

100

60
80

80

10
10

New
Bonds

20

Our proposal
We therefore request that the resecuritisation wording be amended as follows:
The previous consultation revealed some uncertainty within the industry regarding thescope of resecuritisation as defined in Basel 2.5. The Committee clarifies that therationale for assigning higher risk weights to resecuritisation exposures is the increasein correlation risk. For example, this can be found in CDOs of ABS where the risk
assigned to each tranche of the CDO is dependent on the correlation assumed between
various ABS, or between an ABS exposure and other assets. This second-ordercorrelation introduces an additional layer of volatility into the risk assessment
compared to that present in a normal securitisation exposure. The Committee
therefore clarifies that an exposure is considered a resecuritisation exposure if its cash
flows depend on the performance of a pool of more than one asset that contains one ormore securitisation exposures. For example, exposures resulting from retranching are
not resecuritisation exposures if, after retranching, they act like a direct tranching of apool with no securitised assets. Here retranching does not increase correlation risk
which was the rationale for assigning higher risk weights to resecuritisation
exposures. In addition, the Committee confirms that exposures which simply
aggregate exposures to multiple underlying ABS are not resecuritisations if their risk
weights (or ratings under the ERBA) are derived without the use of correlation
assumptions between multiple ABS, or between an ABS and other assets.
Due diligence requirements – penalty risk weight
The investor due diligence requirements set out in paragraphs 32 through 34 of the draft
revised framework24 appears in the existing Basel capital framework25 and in US bank capitalrules,26 as well as (in more detailed form) in the EU's CRR Article 406 (former CRD 122a(4)and (5)) alongside the CRR's risk retention rule. In EU CRR 407, a bank investor thatbreaches either the due diligence requirement or the risk retention requirement can berequired to apply an additional risk weight according to a formula starting at 2.5 times therisk weight that would otherwise apply. In Basel II.5,27 in the US capital rules and in thedraft revised securitisation framework (paragraph 35), a bank investor that breached the due

24
25
26

27

CD page 28.
BCBS 157 pages 5-6, adding Basel II paragraphs 565(i)-(iv).
E.g. 12 C.F.R. §3, Appendix B, Section 10(f) (Office of the Comptroller of the Currency), 12 C.F.R. §208,
Appendix E, Section 10(f) (Federal Reserve System), and 12 C.F.R. §325, Appendix C, Section 10(f)(Federal Deposit Insurance Corporation).
BCBS 157 page 5 (before the new rules text).

24

diligence requirement would have to apply a risk weight of 1250%. (The first consultation
document did not include draft rules text and did not raise this point.)
We believe that the 1250% risk weight penalty creates an "in terrorem" effect that is likely todissuade many banks from investing in securitisations or having other securitisation
exposures, particularly as the due diligence rules are broadly drafted and provide no clarity
on what exactly banks are required to do in order to meet the standard in particular cases. We
believe the proportional additional risk weight approach prescribed in CRR 407, and set out
in more detail in draft implementing technical standards, offers a much more appropriate
remedy. Annex 15 (Calculation of Additional Risk Weights) sets out the CRR rule andrelated technical standard for reference. We propose that the Committee adopt this rule inplace of the 1250% penalty.
Terminology etc.
This does not affect the substance, but please consider giving IRBA a different name –perhaps something based on SFA – that would be less easily confused (especially in spoken
rather than written discussions) with ERBA, RRBA and RBA as well as IRB.
Similarly, there would be less chance for confusion if the proposed SA was called SSFA or
something similar rather than having the same name as the overall Basel SA.
Of course, market practices and terminology often differ across jurisdictions, and we expectthat national regulatory authorities will have reasonable discretion to adapt the framework totheir individual markets rather than being required to apply it mechanically.
Conclusion
We very much appreciate the serious work the Committee has done in developing its
proposal from the previous consultative document and taking into account the comments and
QIS results from the previous consultation, and we are also grateful for the opportunity tooffer our comments and suggestions on its revised proposal. We believe that the proposal has
improved considerably during this process and that, though its problems remain substantial,
the revised framework can be very much improved by application of the proposed changes
explained in this letter. We look forward to discussing our comments with the Committee at
our meeting next month and to continuing work with the Committee on this important
project.

25

Should you have any questions or desire additional information regarding any of thecomments, please do not hesitate to contact any of the Joint Associations' representatives
listed below.
Commercial Real Estate
Finance Council(CREFC)

Commercial Real Estate
Finance Council Europe(CREFC Europe)

Stephen Renna
srenna@crefc.org
Tel: +1 202 448 0860

Peter Cosmetatos
pcosmetatos@crefceurope.org
Tel: +44 20 3651 5696

Global Financial Markets
Association(GFMA)

Institute of International
Finance, Inc.
(IIF)

International Association ofCredit Portfolio Managers(IACPM)

Richard Hopkin
Richard.Hopkin@afme.eu
Tel: + 44 207 743 9375

Barbara Frohnbfrohn@iif.com
Tel: +1 202 857 3311

Som-lok Leung
somlok@iacpm.org
Tel: +1 646 289 5434

International Swaps andDerivatives Association(ISDA)

Securitization Forumof Japan(SFJ)

Structured FinanceIndustry Group(SFIG)

George Handjinicolaou
ghandjinicolaou@isda.org
Tel: +44 20 3088 3574

Hideomi Miyazawa
info@sfj.gr.jp
Tel: +81 3 3580 1156

Sairah Burkisairah.burki@sfindustry.org
Tel: +1 202 524 6302

Chris Killian
ckillian@sifma.org
Tel: +1 914 215 0460

26

Annexes

Annex 1

Joint Associations

Annex 2

Policy support for securitisation

Annex 3

Regulatory reform (EU)

Annex 4

Historical Default Rates for Securitisation: Mid-2007 to End Q3 2013

Annex 5

Securitisation Capital Analysis

Annex 6

Transparent Calibration Methodology per Asset Classes – CMA –Standardised Approach

Annex 7

Calibration under the Standardised Approach

Annex 8Calibration of the SSFA with one parameter

Annex 9Risk-weighting of lower-rated tranches

Annex 10

Proposed changes to IAA provisions

Annex 11

Collateral Cumulative Loss by Vintage (US)Annex 12

CMA with scenarios of parameters on sample of transactions

Annex 13

Capital requirements cap based on retained economic interest

Annex 14Illustration of Program
Resecuritization

Annex 15

Calculation of Additional Risk Weights

27

Wide

CreditEnhancement

TreatedasAnnex 1 – Joint associations
The Commercial Real Estate Finance Council (CREFC) is the trade association for
lenders, investors and servicers engaged in the $3.1 trillion commercial real estate financeindustry. More than 250 companies and 5,500 individuals are members of CREFC. Member
firms include commercial banks, insurance companies, private equity funds, mortgage REITs,
investment grade and B-piece buyers, servicers and rating agencies, among others. CREFC
promotes capital formation, encouraging commercial real estate finance market efficiency,transparency and liquidity. In addition to its member Forums, committees and working
groups, CREFC acts as a legislative and regulatory advocate for the industry, plays a vitalrole in setting market standards and provides education for market participants in this key
sector of the global economy. For further information, please visit www.crefc.org.
The Commercial Real Estate Finance Council Europe (CREFC Europe) is the voice of thecommercial real estate finance industry in Europe. Our role is to promote transparency andliquidity in commercial real estate finance markets by developing and disseminating bestpractice and engaging with regulators, so our industry can flourish while playing its part insupporting the real estate industry and the wider economy. In addition we are the meeting
place for lenders, capital providers, those seeking finance and others with an interest in thehealth of this market. We provide education and networking opportunities for market
participants, and seek to ensure that the industry we champion has a bright and sustainable
future. For further information, please visit www.crefceurope.org.
The Global Financial Markets Association (GFMA) brings together three of the world's
leading financial trade associations to address the increasingly important global regulatory
agenda and to promote coordinated advocacy efforts. The Association for Financial
Markets in Europe (AFME) in London and Brussels, the Asia Securities Industry &Financial Markets Association (ASIFMA) in Hong Kong and the Securities Industry and
Financial Markets Association (SIFMA) in New York and Washington are, respectively,
the European, Asian and North American members of GFMA. For more information, please
visit http://www.gfma.org.
The Institute of International Finance, Inc. (IIF) is a global association created in 1983 in
response to the international debt crisis. The IIF has evolved to meet the changing needs ofthe international financial community. The IIF's purpose is to support the financial industry inprudently managing risks, including sovereign risk; in disseminating sound practices andstandards; and in advocating regulatory, financial, and economic policies in the broad interestof members and foster global financial stability. Members include the world's largest
commercial banks and investment banks, as well as a growing number of insurancecompanies and investment management firms. Among the IIF's Associate members are
multinational corporations, consultancies and law firms, trading companies, export credit
agencies, and multilateral agencies. All of the major markets are represented and participationfrom the leading financial institutions in emerging market countries is also increasing
steadily. Today the IIF has more than 470 members headquartered in more than 70 countries.
For more information, please visit www.iif.com.
The International Association of Credit Portfolio Managers (IACPM) is an industry
association established in 2001 to further the practice of credit exposure management by
providing an active forum for its member institutions to exchange ideas on topics of common
interest. Membership in the IACPM is open to all financial institutions that manage
portfolios of corporate loans, bonds or similar credit sensitive financial instruments. The
28

IACPM represents its members before regulatory and administrative bodies around the world,holds conferences and regional meetings, conducts research on the credit portfolio
management field, and works with other organizations on issues of mutual interest relating to
the measurement and management of portfolio risk. Currently, there are 90 financial
institutions worldwide that are members of the IACPM. These institutions are based in 17
countries and include many of the world's largest commercial wholesale banks, investmentbanks and insurance companies, as well as a number of asset managers. More information
about the IACPM may be found on our website: www.iacpm.org.
Since its founding in 1985, the International Swaps and Derivatives Association (ISDA)
has worked to make over-the-counter (OTC) derivatives markets safe and efficient. Today,
ISDA has over 800 member institutions from 62 countries. These members include a broad
range of OTC derivatives market participants including corporations, investment managers,
government and supranational entities, insurance companies, energy and commodities firms,
and international and regional banks. In addition to market participants, members also include
key components of the derivatives market infrastructure including exchanges, clearinghouses
and repositories, as well as law firms, accounting firms and other service providers. ISDA's
work in three key areas – reducing counterparty credit risk, increasing transparency, andimproving the industry's operational infrastructure – show the strong commitment of the
Association toward its primary goals; to build robust, stable financial markets and a strong
financial regulatory framework. For more information, please visit www2.isda.org.
The Securitization Forum of Japan (SFJ) was founded as a voluntary association in 2005
and established as a corporation in 2007. SFJ aims to contribute to the sound development of
the asset securitization market and carry out the following operations: (1) research and study
associated with asset securitization; (2).exchanges and cooperation with internal and externalorganizations concerned, etc. associated with asset securitization; (3), diffusion andenlightenment of asset securitization; (4) policy recommendations concerning asset
securitization; and (5) any other operations incidental or relevant to operations of the above
items. For more information, please see http://www.sfj.gr.jp/e/index.html.
The Structured Finance Industry Group (SFIG) was established in March 2013 for the
purposes of: (1) educating members, legislators, regulators, and other constituencies about
structured finance, securitization and related capital markets, (2) building the broadest
possible consensus among members on policy, legal, regulatory and other matters affecting or
potentially affecting the structured finance, securitization and related capital markets, (3)advocating on behalf of the structured finance and securitization industry with respect topolicy, legal, regulatory and other matters affecting or potentially affecting the structured
finance, securitization and related capital markets, (4) accomplishing all of the above while
being dedicated to the core principles of governance, financial transparency, inclusion andrespectful accommodation of divergent member views. For more information, please visit
www.sfindustry.org.

29

Annex 2 – Policy support for securitisation

Mario Draghi, president of the ECB, Press conference following the meeting of theGoverning Council of the ECB on 6 March 2014
"If we consider just the revitalisation of the ABS market, there are many things that need tochange in regulation and in legislation. Today, the capital charges for ABS discriminate ABS
unfavourably with respect to other instruments with similar degrees of riskiness. The current
capital regulation of ABS was calibrated on a reality which is not the European one. To give
you an idea, I can't remember exactly the period of reference, but let's say over five or ten
years, the default rate of ABS in the United States was 17.4%; in Europe, it was 1.4%. So you
see that the capital charges are certainly not being calibrated on European ABS, which are
traditionally of a much simpler, transparent and unstructured form. These things have to bechanged, and it will be up to the Basel Committee and the European Commission, as far as
legislation within the EU is concerned, to change some of these regulations. Also there areissues like the sovereign cap: ABS are rated according to their sovereign – perhaps with a few
points difference, but this often does not make much sense. So there are several issues and, inthe end, it may well be the case that, to launch this market, one may need third party
guarantees. So, it is a complex thing on which the ECB's staff is working."
http://www.ecb.europa.eu/press/tvservices/webcast/html/webcast_130905.en.html

Mario Draghi, president of the European Central Bank (ECB), quoted in Financial
Times 4 March 2014
The ECB president said last month: “We think that a revitalisation of a certain type of [assetbacked security], a so-called plain vanilla [asset-backed security], capable of packaging
together loans, bank loans, capable of being rated, priced and traded, would be a very
important instrument for revitalising credit flows and for our own monetary policy.
http://www.ft.com/cms/s/0/544e68ea-a2cd-11e3-ba2100144feab7de.html?siteedition=uk#axzz2wPfK8AZl”Yves Mersch, Member of the Executive Board of the European Central Bank in a
recent speech , discussing the necessary requirements for the recovery in SME funding:Speech to the Institute of International European Affairs, Dublin, 7 February 2014
"This is why I have been vocal in supporting the revitalisation of the securitisation market inEurope, which has virtually dried up in recent years. I see this as an important tool to helpbanks manage the credit risk associated with lending to SMEs. However, for it to recover it
is critical that the regulatory treatment of asset-backed securities (ABS) is based on real dataand not the legacy of the US sub-prime disaster. We have a very different experience with
ABS here in Europe: between mid-2007 and the first quarter of 2013 the default rate on ABS
in the EU was only around 1.4%, whereas it was 17.4% in the United States."
http://www.ecb.europa.eu/press/key/date/2014/html/sp140207.en.html
708696896

Mario Draghi, president of the ECB, at Davos, quoted in January 2014
"What other assets would we buy? One thing is bank loans . . . the issue for further thinking in
the future is to have an asset that would capture and package bank loans in the proper way."
http://www.ft.com/cms/s/0/6646e826-86ab-11e3-aa31-00144feab7de.html#axzz2wPfK8AZl

Mario Draghi, president of the ECB, at Davos, quoted in January 2014
"Right now securitisation is pretty dead,” the ECB president said adding, "that there was a
possibility of buying asset backed securities" if they were “easy to understand, price and tradeand rate."
http://www.ft.com/cms/s/0/6646e826-86ab-11e3-aa31-00144feab7de.html#axzz2wPfK8AZl

The Economist, 11 January 2014
"Most structured products performed well through the crisis[…] Defaults in Europe remained
low despite the recession." "Lenders across Europe are under pressure to improve the ratio of
capital they hold to loans made. One way of doing this is […] through securitisation, bybundling and repackaging loans and selling them to outside investors such as insurance firms
or asset managers, they could lend more money to credit-starved companies."

Andrew Haldane, Director of Financial Stability at the BoE, 10 December 2013"… securitisation could be the "financing vehicle for all seasons" if proper standards aremaintained […]. In a world where we are squeezing risk out of the banking system we would
want a simple, safe, vibrant set of channels for non-bank financing to emerge andsecuritisation is one of those…"
http://www.ft.com/cms/s/0/fdeeb11e-61bb-11e3-916e-00144feabdc0.html#axzz2wPfK8AZl

Yves Mersch, Member of the Executive Board of the ECB, 13 November 2013"… we should promote other forms of financing to complement the banking channel […]through strengthening capital markets and in particular securitisation […] We need to revive
this market. This implies removing some key impediments to its functioning."
http://www.ecb.europa.eu/press/key/date/2013/html/sp131113.en.html

2708696896

Mark Carney, Governor of the Bank of England, noted in a discussion about restoring
SME lending, 28 August 2013…"a well-functioning securitisation market - does mean more efficient balance sheets for thefinancial sector as a whole which frees up capacity, which then can have a knock on effect."
http://www.bankofengland.co.uk/publications/Documents/speeches/2013/speech675trans.pdf

Governor Daniel K. Tarullo, Federal Reserve, 3 March 2013
"The growth and deepening of capital markets lowered financing costs for many companies
and, through innovations such as securitization, helped expand the availability of capital for
mortgage lending."
http://www.federalreserve.gov/newsevents/speech/tarullo20130503a.htm

Commissioner Michel Barnier, 21 February 2013
"Et nous devons aussi nous demander comment donner un nouveau souffle au marché de latitrisation de manière à améliorer la transformation d'échéances par le système financier."
http://europa.eu/rapid/press-release_SPEECH-13-150_fr.htm

Thomas J. Curry. Comptroller of the Currency, 14 February 2013
"Securitization markets are an important source of credit to U.S. households, businesses, andstate and local governments. When properly structured, securitization provides economic
benefits that lower the cost of credit."
http://www.occ.gov/news-issuances/congressional-testimony/2013/pub-test-2013-29written.pdf

Thomas J. Curry. Comptroller of the Currency, 28 January 2013
"The credit-availability pendulum has swung, as it was bound to do, in reaction to poor
performance of the underlying assets, home price instability, and a lack of investor demand
for anything other than a government guaranteed product. As these factors abate,
underwriting standards will need to find a new equilibrium of risk and reward for asustainable mortgage market. Getting the securitization pipeline flowing again is a criticalcomponent in turning this picture around"
http://www.occ.gov/news-issuances/speeches/2013/pub-speech-2013-19.pdf

3708696896

Annex 3 - Regulatory reform (EU)

Mapping of securitisation specific problems during the financial crisis and European Union regulatory reform*

Misaligned interests
between originatorsand investors

Lack of priceinformation instressed secondary
market conditions

Misalignment of reg
capital with credit
risk

Quality of certain
products

Appropriate use ofcredit rating
agencies

Originator to retainsome risk

Price transparency

Review of
regulatory capitalrequirements

Review andstandardisation oflending practices

Conditions for use
and issuer pays

Originatorincentivised to holda percentage of therisk

Pre and post tradetransparency forvenue and OTC
tradesOverreliance on
credit rating
agencies

The issue

Enhanced&standardised
disclosure

High Level
Solution

Solution throughregulation

Information forcomprehensive
assessment of theABS

Detailed
requirements

Example: (1) Credit
quality andperformance of theindividual
underlying asset(2) structure(3) cash flows(4) collateralsupport(5) all informationnecessary to
conduct stress tests
on cash flows andany collateral values

Originators
providing disclosure
to investors andongoing reports

Originators directly
and indirectly
obligated provide
detailed
information toinvestors to meettheir due diligencerequirements

Legal due diligenceobligations forinvestors

Standardisation of
disclosure

Loan-level
disclosure andstandardisedmonthly investor
reporting

Investors must demonstrate acomprehensive understandingof the risks of any ABS they
invest in

Investors must gather sufficient
information to demonstrate
they have a comprehensive aunderstanding of the risk
profile of their securitisation
positions (e.g. structuralfeatures of the securitisation,
the reputational loss
experience of the originator,
risk characteristics of theunderlying asset)

Ongoing monitoringof risk

Monitorperformance
information on
exposures
Regular stress tests
on exposures

Investors to checkthat the originator isretaining risk

Investor needs tocheck that theoriginator has
retained risk prior
to investing
Investor to receive
confirmation atleast on an annual
basis

Investors to check the risk
profile of the originator

Prior to investment investor
must check origination
criteria are soundConfirm effective systems to
manage asset
administration
Adequate diversification oforiginator portfolios
Ensure originator has awritten policy on credit risk

Conditions for use:requirement to use(i) two rating
agencies; (ii)mandatory rotation
for resecuritisation;(iii) firms may only
use CRAs if all of anumber of
conditions are
satisfiedOriginator needs toretain risk in order
to sell to European
investor on an
ongoing basis

Disclosure of price,
volume and time oftransactions for all
tradesFirm pricing for
liquid instruments
and pre trade
disclosure on
demand for illiquid
instruments

Review of capitalcharges forsecuritisations
based on risk
assessments
New capital regime
for complex
structures (i.e.
resecuritisations)

Article 8b CRA3

Art 409 CRR

ECB(not regulation)

Art 406 CRR

Art 206 CRR

Art 406 CRR

Art 15 AIFMR

CRA3

Art 405 CRR

MIFID II

CRD III

Mortgage Credit
Directive

Art 409 CRR

Article 8b CRA3Bank of England(not regulation)

Art 135 Solvency II

Solvency II

Art 135 Solvency II

Solvency II

Article 268/269 CRR

Art 135 Solvency II

PCS liquidity
criteria(not regulation)

Basel RWA

Consumer Credit
Directive

ECB(not regulation)

Solvency II

PCS(not regulation)

Art 17 AIFMD

Art 17 AIFMD

Art 17 AIFMD

Solvency II

Art 408 CRRBank of England(not regulation)

AIFMD

PRIPS

Art 50 UCITS

Art 50 UCITS

UCITS

CRR/CRD IV

PCS/TSI(not regulation)

PCS(not regulation)

UCITS

European Data
Warehouse(not regulation)

Regulations

Article 8b CRA3
*US has introduced similar regulatory initiatives for securitisation, primarily under Dodd-FrankArt 17 AIFMD

Mapping non-asset linked wider market problems that impacted securitisation during the financial crisis and regulatory reform
Excessive leverage of entities heavily dependent on funding from repo markets that suddenly
suffer a liqudity shortage (e.g. fund vehicles dependent on repo funding)

Refinancing risk: maturity transformation by entities heavily dependent on short term funding (e.g. CP) and holding longer term assets whose funding lines are suddenly pulled (e.g. SIVs)
Regime for these entities or entities acquiring their assets

Regime for banks providing credit lines to non-banks

Systemic risk and interconnectedness of the financial system

Regime for banks exposed to non-banks through the provision of repo financing

The issue
Sufficient stable
funding unavailable instressShort term funding
being pulled and norecourse to selling of
liquid assets

Misalignment of reg
capital with credit risk

Incorrectly identifying whobears the risk

Lack of appropriate firesale exit strategy

Management of risk
exposures to entities

Measures for systemic
entities

Require proportion of
stable funding

Require holding of
proportion of liquid
assets to matchstressed outflows

Align reg cap to risk

Clarification and disclosure ofgroup entity risks

Fire-sale exit strategy
must be in place

Management of risk
exposures tocounterparties

Capital buffers for
GSIBs

Stable funding
structural measures

Determine whether an entity
should be included on banks
consolidated balance sheet

Strategy must be inplace for recovery andresolution

Cap the maximum levelof exposure

Entities were systemicHigh Level
Solution

Identification of
globally anddomestically systemic
entities

Solution throughregulation

Methodologies for
identifying GSIBs atgroup level

Methodologies fornational authorities to
identify non-bank
GSIFIsFOR BANK ENTITIES ATCONSOLIDATEDGROUP LEVEL &ENTITY LEVEL:
2.5% capital buffers for
GSIBs

Detailed requirements

Basel IIIFSB proposed
methodologies for
identifying non-bank
GSIBs

Basel IIINet Stable Funding
Ration (NSFR) –proportion of fundingneeds to be obtained
from stable source

CRR/Basel III

Regulations

Liquidity buffers

FOR BANK ENTITIES ATCONSOLIDATEDGROUP LEVEL &ENTITY LEVEL: Liquidity
Coverage Ratio (LCR) –bank/bank entities
must hold a certain
percentage of liquid
assets that can be soldoff within 30 days
under stressed
conditions
FOR NON-BANK
ENTITIES: tools forregulators to introduce
liquidity buffer
requirements*US has introduced similar regulatory initiatives for securitisation, primarily under Dodd-Frank

Align reg cap tocounterparty credit risk

Hold liquid assets
against credit lines tocounterparties

Management ofleverage introduced
through credit lines

Disclosure

Credit lines subject toleverage ratio

Disclosure of grouplevel exposures andcredit lines

Have a resolution
strategy in place wrt
credit lines

Identification of
globally anddomestically systemic
entities

Methodologies for
identifying GSIBs atgroup level

Measures for systemic
entities

Methodologies fornational authorities to
identify non-bank
GSIFIsMinimum haircut
requirements

Transparency of repo
markets

Cap on bank leverage

Capital buffers for
GSIBs

Macroprudential tools

Countercyclical buffers

Macroprudential levers
to dampen credit

Sectoral specificrequirements

CRR/CRD

CRR/CRD

CRR/CRD

Banking Union

Banking Union

Banking Union

Banks providing
funding to non-banks
through a securities
financing transaction
must require aminimum haircut

FOR BANK ENTITIES ATCONSOLIDATEDGROUP LEVEL &ENTITY LEVEL: Holdingof appropriate level ofcapital to absorb
potential losses

FOR BANK ENTITIES ATCONSOLIDATEDGROUP LEVEL &ENTITY LEVEL: fire-salestrategy must be inplace

FOR NON-BANK
ENTITIES: tools forregulators to introduce
liquidity buffer
requirements

BANKS: Maximum cap
on exposures to nonbanks

CRR

CRR

IFRS 10, 11, 12

BRRD

Basel Large Exposures

FSB WS3 shadowbanking tools

Fundamental review of
trading book

LEI

FSB non-bankresolution proposals

CRR

FSB WS3 shadowbanking tools

Entities providing credit
lines - systemic throughinterconnectedness

BANKS: need to holdcapital against thecounterparty

CRR

Banks providing
funding to non-banks
through a securities
financing transaction
must calculate haircuts
on the basis ofminimum qualitativerequirements

BANKS: needs to holdliquid assets against
their credit lines – inthe event that acounterparty defaults

CRR

CRR

IFRS 7
1 July 2011

CRR/CRD

BRRD

Basel IIIFSB proposed
methodologies for
identifying non-bank
GSIBs

Basel III

FSB WS5 shadowbanking proposals

EC SFT proposals

CRRAnnex 4

Annex 5

SECURITIZATION CAPITAL ANALYSISSTRICTLY PRIVATE AND CONFIDENTIAL

March 2014

AgendaSECURITIZATION CAPITAL ANALYSIS

Page
Transaction examples

1

Data support for transaction examples

15

Weighted average capital across all transactions

19

1

Assumptions

 Internal Ratings Based Approach calculations exclude the impact of the 1.06 scaling factor applied to the unexpected loss

within the KIRB calculation. Results are therefore understated under this approach relative to the Consultation.
 For purposes of this analysis, when a bond has more than one AAA tranche, those that share pro rata losses and havedetachment points at 100% are treated as senior for the purposes of the External Ratings Based Approach.
 For transactions with excess spread, the Standardized Approach results in materially higher levels of capital compared to the

TRANSACTION EXAMPLES

External Ratings Based Approach due to the lack of recognition of the transaction’s excess spread.

2

Private Auto Transactions
Prime “A+” Auto Transaction1

Subprime “AA” Auto Transaction1

Internal Ratings Based
External Ratings BasedStandardized

Internal Ratings Based
External Ratings BasedStandardized
160%

120%

140%
RWA Percentage

RWA Percentage

100%
80%
60%
40%

120%
100%
80%
60%
40%

20%

20%

0%

0%
1 Year

1 Year

5 YearMaturity

Maturity

TRANSACTION EXAMPLES

Maturity
1 Year
5 YearInternal
Ratings
Based
35%
106%

External
Ratings
Based
40%
65%

5 YearStandardized
102%
102%

Maturity
1 Year
5 YearInternal
Ratings
Based
134%
134%

External
Ratings
Based
25%
50%

Standardized
22%
22%

These charts display capital calculations for a private auto transaction funded through an ABCP conduit. In addition to the notable lack of
calibration in capital calculations between the approaches, for illustrative purposes, we assumed maturities of one and five years for bothtransactions and we discovered that the Internal Ratings Based Approach (“IRBA”) is only sensitive to changes in maturity for the highest quality
assets. We believe that if maturity is an important factor, it is counterintuitive that it only affects assets of the highest quality.
1Transactions are not publicly rated. Public ratings are inferred from internal credit ratings.

3

Private Trade Receivables Transaction“AA-” Trade Transaction1
Internal Ratings Based
External Ratings BasedStandardized
120%

RWA Percentage

100%
80%
60%
40%
20%
0%
1 YearMaturity

TRANSACTION EXAMPLES

Maturity
1 YearInternal
External
Ratings Based Ratings Based
107%

30%

Standardized
15%

This chart displays capital calculations for a private trade receivables transaction funded through an ABCP conduit. IRBA results in significantly
higher capital than either the External Ratings Based Approach (“ERBA”) and Standardized Approach (“SA”). For U.S. banks who will not have theoption of utilizing the ERBA, IRBA capital levels represent an average of 7 times that of SA, resulting in an unlevel global playing field acrossjurisdictions.
1Transactions are not publicly rated. Public ratings are inferred from internal credit ratings.

4

US CLO Transaction
TELOS 2013-3 CLO – 5 Year Maturity
Internal Ratings Based

External Ratings BasedStandardized

1200%

RWA Percentage

1000%
800%
600%
400%
200%
0%

TRANSACTION EXAMPLES

AAA

AA

A

Tranche
AAA
AA
A
BBB
BB
B

Internal
Ratings
Based
15%
146%
496%
1105%
1250%
1250%

5

BBB

BB

External
Ratings
Based
25%
117%
176%
304%
737%
1032%

Standardized
15%
74%
220%
476%
856%
1209%

B

This chart represents theresult of the entire hierarchyof proposed capital
calculations. A couple ofobservations to note:• Due in part to the maturity
assumption included in the
IRBA, the IRBA (in all but
the senior most tranches
where the floor levels drive
the results) would result ina far more conservative andoutsized level of capital.
• In addition, we note that
there are jurisdictional
differences regarding
required conservatism inthe calculation of KIRB for
investors with imperfect
information. The IRBA ismuch more sensitive toconservatism than theprevious SFA approach,and leads to excessively
conservative results underthe IRBA.

US CLO Transaction
TELOS 2013-3 CLO – 5 Year Maturity
Internal Ratings Based

SFA

1200%

RWA Percentage

1000%
800%
600%
400%
200%
0%

TRANSACTION EXAMPLES

AAA

AA

A

Tranche
AAA
AA
A
BBB
BB
B

BBB
Internal
Ratings
Based
15%
146%
496%
1105%
1250%
1250%

SFA
20%
20%
30%
796%
1250%
1250%

6

BB

B

This chart has been
added to display
the material
increase in capital
between theprevious SFA
approach and the
newly proposed
IRBA. As aninvestor withimperfect
information, there isa requirement tobuild conservatism
into the KIRB. Thisconservatism,
when combinedwith the moreconservative IRBA
inclusive of
maturity, leads tounreasonably highcapital levels on
both absolute andrelative bases.

Dutch RMBS Transaction
DOLPH 2012-2 RMBS Transaction – 5 Year Maturity
Internal Ratings Based

External Ratings BasedStandardized (Prudently Underwritten)
IRBA leads toexcessive capital
results for high quality
Dutch RMBS for thesame reasons cited in
the prior slide. For
investors that may nothave the information
required to calculate
the IRBA, the extreme
lack of calibration
between the ERBA andthe SA is notable. IRBA
capital levels represent
an average of 6 times
the capital generated
by the ERBA for thistransaction, and will
create a very significant
unlevel playing field
across global banks forthe same exposure.

1400%
1200%

RWA Percentage

1000%
800%
600%
400%
200%
0%
TRANSACTION EXAMPLES

AAA

AA

A
Tranche Rating

Tranche
AAA
AA
A
BBB

Internal
Ratings
Based
90%
1246%
1250%
1250%

External
Ratings
Based
25%
127%
185%
313%

Standardized
26%
697%
1138%
1250%

7

BBB

US RMBS Transaction
US Prime RMBS – JPM13003 – 5 Year Maturity
Internal Ratings Based

External Ratings BasedStandardized

1200%

RWA Percentage

1000%
800%
600%
400%
200%
0%

TRANSACTION EXAMPLES

AAA

AAA

AAA

AAA

Tranche
AAA
AAA
AAA
AAA
AAA
AAA
AA
A
BBB
BB
NR

AAA
Internal
Ratings
Based
15%
15%
15%
15%
15%
32%
82%
193%
478%
906%
1250%

AAA

AA

External
Ratings
Based
25%
25%
25%
25%
77%
78%
129%
186%
315%
762%
1232%

A

Standardized
85%
85%
85%
54%
750%
1138%
1250%
1250%
1250%
1250%
1250%

8

BBB

BB

NR

This is a recent RMBS
transaction, and wasadded to this analysis
following the initial
discussion with the
Securitization Working
Group. SA results
represent 12 times capitalvs. ERBA for the 2subordinate AAA
tranches, andapproximately 10 times
capital for the AA tranche.
These differences are ofserious concern to U.S.
banks who can not utilize
the ERBA. While we fully
understand the inability to
fully calibrate between
approaches, such extreme
differences in capital will
impede efficient markets
and lead to material
differences in capitallevels across banks andjurisdictions.

US RMBS Transactions
US Prime RMBS – JPM13002 – 5 Year Maturity
Standardized

External Ratings Based

1200%

1200%

1000%

1000%

800%

800%

RWA Percentage

RWA Percentage

External Ratings Based

US Prime RMBS – CML06FX1 – 5 Year Maturity1

600%
400%
200%

600%
400%
200%
0%

AAA
AAA
AAA
AAA
AAA
AAA
AAA
AA
A
BBB
BB
NR

0%

TRANSACTION EXAMPLESStandardized

Tranche
AAA
AAA
AAA
AAA
AAA
AAA
AAA
AA
A
BBB
BB
NR

External
Ratings
Based
25%
25%
25%
25%
25%
25%
77%
129%
186%
315%
761%
1232%

CCC-

Standardized
15%
15%
15%
15%
15%
15%
373%
630%
950%
1249%
1250%
1250%

Tranche2
CCCCCCCCC-

CCC-

CCC-

External
Ratings
Based
1250%
1250%
1250%

Standardized
485%
485%
485%

1 Mezzanine tranches all have $0 balance.
2 CCC- rating equivalent to Caa3 public rating. Shown as CCC- forpresentation purposes.

These transactions illustrate significant disparity throughout the entire capital structure between all approaches. Given the inability of
U.S. banks to utilize the ERBA, this will result in significant differences in capital levels for the same exposures between jurisdictions.
9US CMBS Transactions
US CMBS- JPC13C16
External Ratings BasedStandardized

RWA Percentage

1200%
1000%
800%
600%
400%
200%
0%

TRANSACTION EXAMPLES

AAA

Tranche
AAA
AAA
AAA
AAA
AAA
AAA
AAAA-*
BBBBB
B
NR

AAA

AAA

External
Ratings
Based
25%
25%
25%
25%
25%
74%
140%
212%
181%
408%
756%
1039%
1192%

AAA

Standardized
15%
15%
15%
15%
15%
131%
309%
572%
288%
985%
1250%
1250%
1250%

AAA

AAA

AA-

A-

A-

BBB-

BB

B

NR

This U.S. CMBS transaction displays significantly higher
capital levels for SA relative to ERBA. Again, this will leadto bank and jurisdictional differences in capital levels for
identical exposures.

* The AA- tranche is relatively thin (attaching 16 and detaching 22). The first A- tranche is also thin (attaching at 12 and detaching at 16). The second A- tranche is an
exchange tranche, and relatively thick (attaching at 12 and detaching at 30). An exchange tranche allows an investor to exchange their Class A B or C certificate for a
related amount of this exchange tranche, which effectively gives the investor the risk profile of the A,B and C tranches combined.

10

US CMBS Transaction
US CMBS – JPC07C20

External Ratings Based

Several tranches of thisCMBS deal weredowngraded since thetransaction’s inception
in 2007. Capital levels
between the ERBA andSA appear to now bebetter calibrated. It is
worth noting that until
the downgrades, there
were large disparities
between the ERBA andSA capital levels,
specifically for thehigher rated tranches
typically owned bybanks.

Standardized

1200%

RWA Percentage

1000%
800%
600%
400%
200%

TRANSACTION EXAMPLES

0%

Tranche
AAA
A+
AAA
A+
BBBBBBB

External
Ratings
Based
25%
65%
25%
65%
375%
375%
970%

Standardized
16%
16%
16%
15%
239%
239%
688%

Tranche
CCC
CCC
CC
CC
C
C
C
D
D

11

External
Ratings
Based
1230%
1234%
1234%
1236%
1236%
1236%
1236%
1236%
1250%

Standardized
1105%
1243%
1250%
1250%
1250%
1250%
1250%
1250%
1250%

US Auto Transaction
Ally Prime Auto – ALLYA125 – 5 Year Maturity
External Ratings BasedStandardized

1200%

RWA Percentage

1000%
800%
600%
400%
200%
0%

TRANSACTION EXAMPLES

AAA

AAA

Tranche
AAA
AAA
AAA
AA +
AA
A

AAA

AA+

External
Ratings
Based
25%
41%

AA

Standardized
15%
15%
222%
820%
1221%
1250%

64%
95%
126%
187%

12

A

The prime autotransaction displayed
here reflects the entire
capital structure for atransaction that is
publicly rated. SA capitallevels are once againmaterially higher for all
non-senior tranches atapproximately 6 times
higher capital levels thanthose dictated by the
ERBA. Again, this is asource of material
concern for U.S. banks
who will not be able toutilize the ERBA
approach.

US Credit Card Transaction
American Express Credit Card (High Quality) – AMCA1202 – Year Maturity
External Ratings BasedStandardized

800%
This transaction represents all
tranches that were not retained by
the seller. SA capital is again
approximately 2-5 times higher than
ERBA capital levels.

700%

RWA Percentage

600%
500%
400%
300%
200%
100%
0%

TRANSACTION EXAMPLES

AAA

A+

External Ratings
BasedStandardized

AAA

25%

48%

A+

135%

704%

Tranche13

Private Student Loan Transaction
Sallie Mae Private Student Loan – SLMPC04A – 5 Year Maturity

External Ratings BasedStandardized

1200%

This transaction
illustrates that acrossthe capital structure,
the proposed
framework results in
SA capital that is
approximately 2-3
times higher thancapital calculated
utilizing the ERBA .

RWA Percentage

1000%
800%
600%
400%
200%
0%

TRANSACTION EXAMPLES

AA-

A

BBB

BB-

External
Ratings
Based
55%

Standardized
131%

A

75%

131%

BBB

304%

1123%

BB-

786%

1250%

TrancheAA-

14

AgendaSECURITIZATION CAPITAL ANALYSIS

Page
Transaction examples

1

Data support for transaction examples

15

Weighted average capital across all transactions

19

15

Data Support for Transactions with Internal Ratings Based Approach (“IRBA”)
Results
US Prime “A+” Auto Transaction
Maturity
1 Year
5 YearBasel Proposal
IRBA
35.23%
105.61%US Subprime “AA” Auto Transaction
Maturity
1 Year
5 Year

IRBA
133.94%133.94%

IRBA
106.66%DATA SUPPORT FOR TRANSACTION EXAMPLES

IRBA
15.00%
146.23%496.38%1104.68%
1250.00%
1250.00%IRBA

US Prime RMBS – JPM13003 – 5 Year Maturity
Rating
AAA
AAA
AAA
AAA
AAA
AAA
AA
A
BBB
BB
NR

Detach100.00%100.00%ERBA
25.00%
50.00%

ERBA
30.00%

ERBA
25.00%
116.53%175.79%303.68%736.89%1032.15%

W
0.83%
0.83%

KIRB
9.15%
9.15%

p (IRB)
30.00%
85.82%

KIRB
29.09%
29.09%p (IRB)
30.00%
30.00%

KIRB
25.61%p (IRB)
30.00%

KIRB
15.20%
15.20%
15.20%
15.20%
15.20%
15.20%p (IRB)
32.60%
46.44%
46.44%
46.44%
46.44%
46.44%

KIRB
7.74%
7.74%
7.74%
7.74%

p (IRB)
90.53%
112.28%112.28%112.28%

KIRB
1.32%
1.32%
1.32%
1.32%
1.32%
1.32%
1.32%
1.32%
1.32%
1.32%
1.32%

p (IRB)
136.95%136.95%136.95%136.95%148.15%148.15%148.15%148.15%148.15%148.15%148.15%

Parameters
Standardized
22.40%
22.40%

Attach30.47%
30.47%

Detach100.00%100.00%

W
4.56%
4.56%
Parameters

Standardized
15.00%

Attach27.25%

Detach100.00%Basel Proposal

Dutch RMBS - DOLPH 2012-2 RMBS Transaction – 5
Year Maturity
Rating
AAA
AA
A
BBB

Attach
9.35%
9.35%

Basel Proposal

US CLO - TELOS 2013-3 CLO – 5 Year Maturity
Rating
AAA
AA
A
BBB
BB
B

Standardized
101.58%101.58%Basel Proposal“AA-” Trade Receivables Transaction
Maturity
1 Year

ERBA
40.00%
65.00%

Parameters

W
0.84%
Parameters

Standardized
15.00%
73.88%
219.73%475.72%855.51%1209.15%

Attach
36.14%
25.78%
18.30%
13.20%
8.90%
7.20%

Detach100.00%36.14%
25.78%
18.30%
13.20%
8.90%

Basel Proposal
ERBA
Standardized

90.46%
1245.76%1250.00%
1250.00%

25.00%
127.14%185.06%312.96%25.66%
697.27%1138.47%1250.00%

Basel Proposal
IRBA

ERBA

Standardized

15.00%
15.00%
15.00%
15.00%
15.00%
32.01%
82.07%
193.22%477.66%905.75%1250.00%

25.00%
25.00%
25.00%
25.00%
76.80%
77.60%
128.68%185.86%315.30%761.72%1232.05%

84.88%
84.88%
84.88%
53.91%
750.20%1137.79%
1250.00%
1250.00%
1250.00%
1250.00%
1250.00%

W
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%

Parameters
AttachDetach
8.10% 100.00%
5.90%
8.10%
3.30%
5.90%
1.10%
3.30%

W
0.85%
0.85%
0.85%
0.85%

Parameters

16

Attach10.17%
10.17%
10.17%
14.17%
10.17%
7.17%
6.16%
3.98%
2.51%
1.44%
0.00%

Detach100.00%100.00%100.00%100.00%14.17%
10.17%
7.17%
6.16%
3.98%
2.51%
1.44%

W
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%

Data Support for Transactions without IRBA Results – 1 of 2
US Prime RMBS – JPM13002 – 5 Year Maturity
JPMMT 2013-2
46640BAA2
46640BAC846640BAD6
46640BAE4
46640BAQ7
46640BAR5
46640BAF1
46640BAJ3
46640BAK046640BAL8
46640BAM6
46640BAN4

Tranche
A1
A2
A3
A4
A5
A6
AM
B1
B2
B3
B4
B5

Basel Proposal

Rating
AAA
AAA
AAA
AAA
AAA
AAA
AAA
AA
A
BBB
BB
NR

ERBA
25.00%
25.00%
25.00%
25.00%
25.00%
25.00%
77.36%
128.55%185.96%315.07%761.00%1232.47%DATA SUPPORT FOR TRANSACTION EXAMPLES

US Prime RMBS – CML06FX1 – 5 Year Maturity
CMLT 2006-FX1
17309YAC1
17309YAD9
17309YAE7

TrancheA3
A4
A5

Tranche
A1
A2
A3
A4
ASB
AS
B
C
EC
D
E
F
NR

Attach
10.65%
10.65%
10.65%
10.65%
10.65%
10.65%
7.35%
6.24%
4.11%
2.57%
1.40%
0.00%

Basel Proposal

Rating1
CCCCCCCCC-

ERBA
1250.00%
1250.00%
1250.00%

US CMBS- JPC13C16
JPMCC 2013-C16
46641BAA1
46641BAB9
46641BAC746641BAD546641BAE3
46641BAH6
46641BAJ2
46641BAK9
46641BAL7
46641BAP8
46641BAR4
46641BAT0
46641BAV5Standardized
15.00%
15.00%
15.00%
15.00%
15.00%
15.00%
372.63%629.60%949.84%1249.21%1250.00%
1250.00%

Parameters

Standardized
484.91%484.91%484.91%

ERBA
25.00%
25.00%
25.00%
25.00%
25.00%
74.09%
140.24%212.02%181.46%408.48%755.55%1039.49%
1192.12%

1 CCC- rating equivalent to Moody’s Caa3 public rating. Shown as CCC- for presentation purposes.

17Standardized
15.00%
15.00%
15.00%
15.00%
15.00%
130.98%309.49%572.09%288.30%984.77%1250.00%
1250.00%
1250.00%

W
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%

Kg
4.02%
4.02%
4.02%
4.02%
4.02%
4.02%
4.02%
4.02%
4.02%
4.02%
4.02%
4.02%

Parameters
Attach
0.00%
0.00%
0.00%

Basel Proposal
Rating
AAA
AAA
AAA
AAA
AAA
AAA
AAAABBBBB
B
NR

Detach100.00%100.00%100.00%100.00%100.00%100.00%10.65%
7.35%
6.24%
4.11%
2.57%
1.40%

Detach100.00%100.00%100.00%W
28.08%
28.08%
28.08%

Kg
7.66%
7.66%
7.66%

Parameters
Attach30.03%
30.03%
30.03%
30.03%
30.03%
22.65%
16.14%
12.51%
12.51%
7.51%
5.63%
4.63%
0.00%

Detach100.00%100.00%100.00%100.00%100.00%30.03%
22.65%
16.14%
30.03%
12.51%
7.51%
5.63%
4.63%

W
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%

Kg
8.00%
8.00%
8.00%
8.00%
8.00%
8.00%
8.00%
8.00%
8.00%
8.00%
8.00%
8.00%
8.00%

Data Support for Transactions without IRBA Results – 2 of 2
US CMBS – JPC07C20
JPMCC 2007-C20
46631QAC6
46631QAD4
46631QAE2
46631QAF946631QAH546631QBX946631QAJ1
46631QAM446631QAP746631QAR346631QAT946631QAV446631QAX046631QAZ546631QBB7
46631QBD3

Tranche
A3
A4
ASB
A1A
AM
AMFX
AJ
B
C
D
E
F
G
H
J
K

Basel Proposal
Rating
AAA
A+
AAA
A+
BBBBBBB
CCC
CCC
CC
CC
C
C
C
D
D

ERBA
25.00%
65.00%
25.00%
65.00%
375.13%375.13%969.62%1230.06%
1234.05%
1234.05%
1236.04%
1236.04%
1236.04%
1236.04%
1236.04%
1249.83%

DATA SUPPORT FOR TRANSACTION EXAMPLES

Ally Prime Auto – ALLYA125 – 5 Year Maturity
Ally Auto Recbles 2012-5
02005BAB2
02005BAC002005BAD802005BAE6
02005BAF3
02005BAG1

Tranche
A2
A3
A4
B
C
D

Rating
AAA
AAA
AAA
AA+
AA
A

TrancheA
B

RatingAAA
A+

ERBA
25.00%
41.29%
63.81%
95.12%
125.77%186.91%

TrancheA2
A3
B
C

RatingAAA
BBBBB-

Standardized
15.00%
15.00%
221.61%820.13%1221.45%
1250.00%

ERBA
25.00%
134.78%

Standardized
47.73%
704.41%

Attach82.79%
34.40%
14.16%
9.29%
6.04%
4.41%

Standardized
131.42%131.42%1123.40%
1250.00%

1 Different W values within the same transaction result from distinct collateral pools underlying different tranches.

18

W1
3.37%
3.37%
3.37%
0.00%
2.91%
2.91%
2.91%
2.91%
2.91%
2.91%
2.91%
2.91%
2.91%
2.91%
2.91%
2.91%

Kg
8.00%
8.00%
8.00%
8.00%
8.00%
8.00%
8.00%
8.00%
8.00%
8.00%
8.00%
8.00%
8.00%
8.00%
8.00%
8.00%

Detach100.00%82.79%
34.40%
14.16%
9.29%
6.04%

W
0.39%
0.39%
0.39%
0.39%
0.39%
0.39%

Kg
8.00%
8.00%
8.00%
8.00%
8.00%
8.00%

Parameters
Attach16.00%
10.25%

Basel Proposal
ERBA
55.00%
75.00%
304.40%785.53%

Detach100.00%100.00%100.00%100.00%31.59%
31.59%
18.83%
11.18%
9.58%
8.31%
6.87%
5.76%
4.64%
3.36%
1.61%
0.01%

Parameters

Basel Proposal

Sallie Mae Private Student Loan – SLMPC04A – 5 Year Maturity
SLM Private 2004-A
78443CBG878443CBH678443CBJ278443CBK9

Attach31.59%
31.59%
31.59%
31.59%
18.83%
18.83%
11.18%
9.58%
8.31%
6.87%
5.76%
4.64%
3.36%
1.61%
0.01%
0.00%

Basel Proposal

American Express Credit Card (High Quality) – AMCA1202 – 5 Year Maturity
American Express 2012-2
02582JGD602582JGE4Standardized
16.37%
16.37%
16.37%
15.00%
239.24%239.24%687.85%1104.85%
1243.46%1250.00%
1250.00%
1250.00%
1250.00%
1250.00%
1250.00%
1250.00%

Parameters

Detach100.00%16.00%

W
0.56%
0.56%

Kg
8.00%
8.00%

Parameters
Attach
15.62%
15.62%
10.74%
1.03%

Detach100.00%100.00%15.62%
10.74%

W
9.53%
9.53%
9.53%
9.53%

Kg
8.00%
8.00%
8.00%
8.00%

AgendaSECURITIZATION CAPITAL ANALYSIS

Page
Transaction examples

1

Data support for transaction examples

15

Weighted average capital across all transactions

19

19

Weighted Average RWA of Transactions where IRBA was able to be CalculatedInternal Ratings Based

External Ratings BasedStandardized

1200%
1000%

RWA Percentage

WEIGHTED AVERAGE CAPITAL ACROSS ALL TRANSACTIONS

800%
600%
400%
200%
0%
AAA

AA

AA-

A+

A

Internal Ratings
Based
79%

External
Ratings
Based
25%

Standardized
33%

AA

674%

89%

355%

AA-

107%

30%

15%

A+

106%

65%

102%

A

1216%

185%

1110%

BBB

1241%

313%

1230%

BB

1183%

742%

932%

B

1250%

1032%

1209%

NR

1250%

1232%

1250%

Tranche
AAA

20

BBB

BB

B

NR

This slide represents the weighted average of the six
transactions where IRBA was calculated. The lack of
calibration of the three approaches is distinctly
noticeable and the IRBA provides higher capital thanboth alternative approaches in all cases.

Weighted Average RWA of Transactions where Only External Ratings BasedApproach and Standardized Approach could be Calculated
External Ratings BasedStandardized

1200%

This slide represents
the weighted averagecalculations for thenine transactions
where IRBA could
not be calculated.
We see that for thehigher rated tranches
that banks typicallyhold (AAA throughBB-), the SA yields
materially higher
capital than ERBA for
almost all of thesehigher rated
tranches.

RWA Percentage

WEIGHTED AVERAGE CAPITAL ACROSS ALL TRANSACTIONS

1000%
800%
600%
400%
200%
0%

TrancheExternal Ratings
BasedStandardized

AAA

27%

35%

AA+

95%

820%

AA

90%

372%

AA-

66%

127%

External
Ratings Based
381%

Standardized
375%

BB

750%

1118%

BB-

786%

1250%

B

976%

744%

CCC

1232%

1166%

Tranche
BBB-

A+

70%

71%

CCC-

1250%

485%

A

154%

837%

CC

1235%

1250%

A-

187%

337%

C

1236%

1250%

1226%

D

1236%

1250%

NR

1199%

1250%

BBB

312%

21

ANNEX 6: TRANSPARENT CALIBRATION PER ASSET CLASSES – CMA – STANDARSISED APPROACH *Framework

Proposed Regulatory Asset Class

Typically real life asset class

Regulatory LGD

StressedConcentration*

Correlation ρ M
Wholesale
Wholesale
Wholesale
Wholesale

Wholesale

Wholesale

Wholesale
Wholesale
Wholesale
Wholesale
Wholesale
RetailRetailRetailRetailGranular Short Term Corporate
Exposures
Granular Low RW Medium to Long
Term Corporate Exposures
Granular High RW Medium to Long
Term Corporate Exposures

Trade Receivables, Trade Finance (typically assets with 1 to 3 months
maturity)High Grade (typically assets rated in the 100% category or
exceptionally lower)
Leveraged Loans (typically assets rated in the single B category or risk
weighted at 150%)
European SME (BCBS128, art 273, corporate exposures where theGranular SME
reported sales for the consolidated group of which the firm is a part isless than €50 million)
Commodities Finance (BCBS128, art 224, structured short-term
Specialised Lending (Commodities
lending to finance reserves, inventories, or receivables of exchangeFinance)
traded commodities (e.g. crude oil, metals, or crops)
Project Finance (BCBS128, art 221, large, complex and expensive
installations that might include, for example, power plants, chemical
Specialised Lending (Project Finance)
processing plants, mines, transportation infrastructure, environment,
and telecommunications infrastructure)
Transportation (BCBS128, art 223, ships, aircraft, satellites, railcars,Specialised Lending (Object Finance)
and fleets)
CMBS (BCBS128, art 226), office buildings to let, retail space,
Specialised Lending (Income Producing
multifamily residential buildings, industrial or warehouse space, andReal Estate)
hotels)Specialised Lending (High Volatility
CRE CMBS (BCBS128, art 227, real estate assets where source ofCommercial Real Estate)
repayment is substantially uncertain)
Other Granular Wholesale
Typically, CFOs of Hedge Funds, Private Equity, Market Value CLOs
Other Non-Granular Wholesale
Low RW Residential Mortgages
Typically, Prime Mortgages
High RW Residential Mortgages
Typically, Subprime Mortgages
Revolving Qualifying Retail
Credit Cards
Other Retail
Consumer Loans, Auto Loans, etc...

(for Senior(for Non-SeniorTranche) Capital Tranche) Capital
Surcharge Scaling Surcharge Scaling
Factor CSSFM
Factor CSSFM

46%

8%

1.00

1.05

46%

22%

1.05

1.18

46%

16%

1.10

1.36

45%

15%

1.05

1.17

27%

13%

1.00

1.18

27%

33%

1.10

1.33

27%

27%

1.16

1.52

47%

36%

1.06

1.19

47%

34%

1.08

1.24

76%
53%
25%
45%
75%
75%

30%
40%
11%
12%
3%
12%

1.07
1.08
1.14
1.22
1.06
1.10

1.23
1.26
1.47
1.73
1.39
1.35

* Full details appear in G. Duponcheele, W. Perraudin & D. Totouom-Tangho, Calibration of the Simplified Supervisory Formula Approach(BNP Paribas mimeo, 21 March 2014).

Annex 7 – Calibration under the Standardised Approach
The table hereafter summarises suggested calibration for the capital surcharge in the CMA, MSSFAand SFFA for different securitisation asset classes, both for senior and non-senior tranches, when SA
Risk Weights are employed. This calibration is based on the work done by the Quant group. The
calibration is transparent and is described in details in the paper “Calibration of the Simplified
Supervisory Formula Approach” by Duponcheele and al.
The last column in the table shows the calibration under BCBS 269 for the capital surcharge of the
SSFA SA for which a one-size-fits-all capital surcharge of 100% is proposed.

CALIBRATION UNDER THE STANDARDISED APPROACH

Framework

Proposed
Regulatory AssetClass

Granular Short Term
Wholesale Corporate
Exposures
Granular Low RW
Medium to Long
Wholesale
Term Corporate
Exposures
Granular High RW
Medium to Long
Wholesale
Term Corporate
Exposures
Wholesale Granular SME
Specialised Lending
Wholesale (Commodities
Finance)Specialised Lending
Wholesale(Project Finance)
Specialised Lending
Wholesale(Object Finance)
Specialised Lending
Wholesale (Income Producing
Real Estate)
Specialised Lending(High Volatility
WholesaleCommercial Real
Estate)Other Granular
Wholesale
Wholesale
Other Non-Granular
Wholesale
Wholesale
Low RW Residential
RetailMortgages(for Senior and(for Senior(for Non-Senior(for Senior(for Senior(for Non-Senior (for Non-Senior Non-SeniorTranche)Tranche)Tranche) Capital Tranche) CapitalTranche) Capital Tranche) Capital Tranche) BCBS
CapitalCapitalSurcharge MSSFA Surcharge SSFA
Surcharge MSSFA Surcharge SSFA
269 Capital
Surcharge CMA
Surcharge CMA(p2-p1)(p)(p2-p1)(p)
Surcharge SSFA(CSSFM-1)(CSSFM-1)
(p)

0%

7%

27%

5%

11%

29%

100%

5%

13%

47%

18%

26%

54%

100%

10%

17%

36%

36%

41%

52%

100%

5%

12%

43%

17%

25%

49%

100%

0%

6%

21%

18%

18%

28%

100%

10%

20%

55%

33%

47%

69%

100%

16%

26%

50%

52%

69%

77%

100%

6%

13%

55%

19%

29%

62%

100%

8%

18%

52%

24%

37%

62%

100%

7%

13%

54%

23%

31%

62%

100%

8%

17%

58%

26%

34%

67%

100%

14%

21%

44%

47%

55%

66%

100%

RetailHigh RW Residential
Mortgages

22%

28%

44%

73%

88%

89%

100%

RetailRevolving
Qualifying Retail

6%

9%

23%

39%

35%

41%

100%

RetailOther Retail

10%

16%

46%

35%

42%

61%

100%

708842000

Annex 8 – Calibration of the SSFA with one parameter

Source: D. Duponcheele, W. Perraudin & D. Totouom-Tangho,
Totouom Tangho, Calibration of the Simplified
Supervisory Approach (BNP Paribas mimeo, 21 March 2014).

708765922

Annex 9 – Risk-weighting of lower-rated tranches
This table compares ERBA proposed risk weights for lower-rated senior tranches with
Moody's idealised expected loss rates and implied risk weights:
ERBA Risk Weight(Senior Tranche)
Rating 1 year
5 year
CCC
460%
530%
CC
1250%
1250%
C
1250%
1250%
D
1250%
1250%

Moody's Idealised
Expected Loss Rates
1 year
5 year
14%
27%
55%
55%
100%
100%
100%
100%

Moody's Implied
Risk Weights
1 year
5 year
460%
530%
837%
810%
1250%
1250%
1250%
1250%

This table compares ERBA proposed risk weights for lower-rated senior tranches with Fitch
idealised default rates and implied risk weights:
ERBA Risk Weight(Senior Tranche)
Rating 1 year
5 year
CCC
460%
530%
CC
1250%
1250%
C
1250%
1250%
D
1250%
1250%

Fitch Idealised
Default Rates
1 year
5 year
25%
51%
51%
75%
75%
100%
100%
100%

Fitch Implied
Risk Weights
1 year
5 year
460%
530%
871%
887%
1250%
1250%
1250%
1250%

Implied risk weights are calculated by extrapolating between the CCC risk weights and1250%, according to the relative expected loss and default rates. The average outcome is851%.

708841978Annex 10 – Proposed changes to IAA provisions
46.
A bank that is located in a jurisdiction that permits use of the External
Ratings-Based Approach may use an Internal Assessment Approach (IAA) as
described in paragraphs 66 to 69 for its unrated securitisation exposure (eg liquidity
facilities and credit enhancements) to an ABCP programme that is an SA pool or its
other unrated securitisation exposure funded directly by the bank. In order to use the
IAA, a bank must have supervisory approval to use the IRB approach. A bank should
consult with its national supervisor on whether and when it can apply the IAA to its
securitisation exposures, especially where the bank can apply IRB for some, but not
all underlying exposures. To ensure appropriate capital levels, there may beinstances where the supervisor requires a treatment other than this general rule.
…
(iii)

Internal Assessment Approach (IAA)

66.
Subject to supervisory approval a bank may use its internal assessments ofthe credit quality of the securitisation exposures the bank extends to ABCP
programmes (eg liquidity facilities and credit enhancements) and unrated
securitisation exposures the bank funds directly if the bank's internal assessment
process meets the operational requirements below. Internal assessments of such
exposures provided to ABCP programmes must be mapped to equivalent externalratings of an ECAI. Those rating equivalents are used to determine the appropriate
risk weights under the External Ratings-Based Approach for purposes of assigning
the notional amounts of the exposures.
67.
A bank's internal assessment process must meet the following operational
requirements in order to use internal assessments in determining the IRB capitalrequirement for securitisation exposures arising from liquidity facilities, credit
enhancements, or other exposures extended to an ABCP programme and for
unrated securitisation exposures funded directly by the bank.

(a)

For the unrated exposure to qualify for the IAA, the ABCP must be externally
rated. The ABCP itself is subject to the External Ratings-BasedApproach.[Reserved](b)

The internal assessment of the credit quality of athe securitisation exposure to
the ABCP programme must be based on ECAI criteria for the asset type
purchased, and must be the equivalent of at least investment grade when
initially assigned to an exposure. In addition, the internal assessment must be
used in the bank's internal risk management processes, including
management information and economic capital systems, and generally mustmeet all the relevant requirements of the IRB framework.

(c)

In order for banks to use the IAA, their supervisors must be satisfied (i) that
the ECAI meets the ECAI eligibility criteria outlined in paragraphs 90 to 108
and (ii) with the ECAI rating methodologies used in the process. In addition,banks have the responsibility to demonstrate to the satisfaction of their708707023

supervisors how these internal assessments correspond with the relevant
ECAI's standards.
For instance, when calculating the credit enhancement level in the context of
the IAA, supervisors may, if warranted, disallow on a full or partial basis any
seller-provided recourse guarantees or excess spread, or any other first-loss
credit enhancements that provide limited protection to the bank.
(d)The bank's internal assessment process must identify gradations of risk.
Internal assessments must correspond to the external ratings of ECAIs so thatsupervisors can determine which internal assessment corresponds to eachexternal rating category of the ECAIs.

(e)

The bank's internal assessment process, particularly the stress factors fordetermining credit enhancement requirements, must be at least as
conservative as the publicly available rating criteria of the major ECAIs thatare externally rating the ABCP programme's commercial paper issued by the
bank's ABCP programme, if any, or of at least two of the major ECAIs, if
otherwise, for the asset type being purchased by the programme. However,banks should consider, to some extent, all publicly available ECAI rating
methodologies in developing their internal assessments.

In the case where (i) the commercial paper issued by an ABCP programme isexternally rated by two or more ECAIs, or the bank otherwise selects two or
more ECAIs whose rating criteria will be the basis for its internal assessments,and (ii) the different ECAIs' benchmark stress factors require different levels ofcredit enhancement to achieve the same external rating equivalent, the bankmust apply the ECAI stress factor that requires the most conservative or
highest level of credit protection. For example, if one ECAI required
enhancement of 2.5 to 3.5 times historical losses for an asset type to obtain asingle A rating equivalent and another required two to three times historicallosses, the bank must use the higher range of stress factors in determining
the appropriate level of seller-provided credit enhancement.
When selecting ECAIs to externally rate an ABCP programme or whose
published criteria will otherwise provide the basis for the bank's internal
assessment process, a bank must not choose only those ECAIs that generally
have relatively less restrictive rating methodologies. In addition, if there arechanges in the methodology of one of the selected ECAIs, including the stressfactors, that adversely affect the external rating of the programme's
commercial paper, then the revised rating methodology must be considered in
evaluating whether the internal assessments assigned to ABCP programme
exposures or other unrated exposures are in need of revision.
A bank cannot utilise an ECAI's rating methodology to derive an internal
assessment if the ECAI's process or rating criteria is not publicly available.
However, banks should consider the non-publicly available methodology — tothe extent that they have access to such information ─ in developing theirinternal assessments, particularly if it is more conservative than the publicly
available criteria.
In general, if the ECAI rating methodologies for an asset or exposure are notpublicly available, then the IAA may not be used. However, in certain
instances, for example, for new or uniquely structured transactions, which are







708707023

not currently addressed by the rating criteria of an ECAI rating the
programme's commercial paper, a bank may discuss the specific transaction
with its supervisor to determine whether the IAA may be applied to the related
exposures.
(f)Internal or external auditors, an ECAI, or the bank's internal credit review orrisk management function, must perform regular reviews of the internal
assessment process and assess the validity of those internal assessments. If
the bank's internal audit, credit review, or risk management functions performthe reviews of the internal assessment process, then these functions must be
independent of the ABCP programme or other relevant business line, as wellas the underlying customer relationships.

(g)

The bank must track the performance of its internal assessments over time toevaluate the performance of the assigned internal assessments and makeadjustments, as necessary, to its assessment process when the performanceof the exposures routinely diverges from the assigned internal assessmentson those exposures.

(h)

The ABCP programme or, as applicable, the bank's relevant business line
must have credit and investment guidelines, ie underwriting standards, for the
ABCP programme or that business line, as applicable. In the consideration ofan asset purchase, the ABCP programme (ie the programme administrator) or
the business line, as applicable, should develop an outline of the structure of
the purchase transaction. Factors that should be discussed include the type of
asset being purchased; type and monetary value of the exposures arisingfrom the provision of liquidity facilities and credit enhancements; loss waterfall;and legal and economic isolation of the transferred assets from the entity
selling the assets.

(i)

A credit analysis of the asset seller's risk profile must be performed andshould consider, for example, past and expected future financial performance;
current market position; expected future competitiveness; leverage, cash flow,
and interest coverage; and debt rating. In addition, a review of the seller's
underwriting standards, servicing capabilities, and collection processes shouldbe performed.

(j)

The ABCP programme's or relevant business line's underwriting policy must
establish minimum asset eligibility criteria that, among other things:




(k)

exclude the purchase of assets that are significantly past due or
defaulted;
limit excess concentration to individual obligor or geographic area; andlimit the tenor of the assets to be purchased.

The ABCP programme or relevant business line, as applicable, should havecollections processes established that consider the operational capability andcredit quality of the servicer. The programme or business line should mitigate
to the extent possible seller/servicer risk through various methods, such as
triggers based on current credit quality that would preclude co-mingling of708707023

funds and impose lockbox arrangements that would help ensure the continuityof payments to the ABCP programme or the bank.
(l)

The aggregate estimate of loss on an asset pool that the ABCP programme or
relevant business line, as applicable, is considering purchasing must consider
all sources of potential risk, such as credit and dilution risk. If theseller-provided credit enhancement is sized based on only credit-related
losses, then a separate reserve should be established for dilution risk, if
dilution risk is material for the particular exposure pool. In addition, in sizing
the required enhancement level, the bank should review several years ofhistorical information, including losses, delinquencies, dilutions and theturnover rate of the receivables. Furthermore, the bank should evaluate thecharacteristics of the underlying asset pool (eg weighted-average credit score)and should identify any concentrations to an individual obligor or geographic
region and the granularity of the asset pool.

(m)

The ABCP programme or other relevant business line, as applicable, must
incorporate structural features into the purchase of assets in order to mitigate
potential credit deterioration of the underlying portfolio. Such features may
include wind-down triggers specific to a pool of exposures.

68.
The exposure amount of the securitisation exposure to the ABCP programmeor other unrated securitisation exposure must be assigned to the risk weight in theExternal Ratings-Based Approach appropriate to the credit rating equivalentassigned to the bank's exposure.
69.
If a bank's internal assessment process is no longer considered adequate, thebank's supervisor may preclude the bank from applying the IAA to its ABCP
exposures or other unrated exposures, both existing and newly originated, fordetermining the appropriate capital treatment until the bank has remedied the
deficiencies. In this instance, the bank must revert to the Standardised Approachdescribed in paragraphs 70 to 77.

708707023

Annex 11

Collateral Cumulative Loss by Vintage (US)
40.0%
35.0%

Collateral Cumulative Loss %

30.0%
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
1

3

5

7

9

11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55 57 59 61 63 65 67 69 71 73 75 77 79 81 83
Months from Issuance2004 Prime Auto2007 Prime Auto2004 Non-Prime Auto2007 Non-Prime Auto2004 CMBS

2007 CMBS

2004 Subprime/Home Equity

2007 Subprime/Home Equity

Source: Auto collateral loss data sourced from JP Morgan Research consumer ABS research reports. CMBS and Subprime/Home Equity loss data sourced from Intex (data retrieved as of 2/24/13)
Note: For Auto, the loss curve ends prior to Month 83 as the weighted-average life of the collateral was shorter than the other asset classes

CMA with scenarios of parameters on sample of transactions
CMA using standard CSSF of 1.3 and 20% stressed correlation

Annex 12
Base

StressStresses

Pool RW * 2

LGD *1.5
rho* x2

rho* x5

CMA

CMA

CMA

64.1%
892.6%
1153.0%61.9%
936.8%
1179.7%71.5%
767.1%
1048.0%79.2%
1167.9%1249.5%CMA
43.2%
913.0%
1230.3%CMA
46.5%
841.1%
1201.9%CMA
56.7%
626.8%
1003.0%CMA
347.3%
1245.3%1249.0%1249.8%1250.0%1250.0%CMA
163.0%
927.9%
1066.1%1166.0%1220.6%1245.7%

CMA
181.7%
859.4%
985.6%
1095.4%1172.3%1231.5%CMA
232.5%
737.6%
823.7%
915.5%
999.2%
1129.2%

CMA
150.1%
1186.9%1235.6%1247.2%1249.5%1249.9%1250.0%1250.0%CMA
56.8%
509.7%
730.1%
927.8%
1075.3%1177.9%1223.1%1245.7%

CMA
79.1%
524.4%
698.2%
860.5%
996.1%
1111.1%1176.9%1231.7%

CMA
138.8%
540.9%
642.6%
741.7%
835.1%
933.3%
1007.6%1131.4%

CMA

CMA
1.3%
74.9%
174.9%
511.7%
1070.5%

CMA
2.3%
98.3%
194.6%
485.7%
1007.6%CMA
6.0%
142.5%
220.2%
420.2%
833.8%

CMA
0.0%
356.3%

CMA
0.0%
356.3%

CMA
0.3%
355.9%

CMA
0.0%
0.2%
0.7%
194.0%

CMA
0.0%
0.9%
2.6%
193.6%

CMA
0.2%
8.3%
15.6%
189.1%

CMA
0.6%
210.1%
940.9%

CMA
1.2%
223.3%
883.6%

CMA
3.5%
240.9%
736.3%

Current rho*
French SME
Tranche S
Mezzanine
EquityAttachment

SSFA KIRB uncapped
and unfloored

6.10%
3.50%
0.00%

32.3%
1243.0%1250.0%CMA
32.1%
770.0%
1124.0%CMA
112.1%
1167.8%1239.7%

CLO Corporate High grade
Tranche S
Mezzanine
EquityAttachment uncapped and unfloored
4.60%
23.1%
0.50%
1237.4%0.00%
1250.0%CMA

CLO US pre crisis
A-1L
A-2L
A-3L
B-1L
B-2L
PREF

Attachment uncapped and unfloored
26.76%
45.4%
21.03%
945.6%
16.92%
1250.0%11.25%
1250.0%8.57%
1250.0%0.00%
1250.0%CMA

CLO US post crisis
A
B1
B2
C
D
E
F
SUBORD

Attachment uncapped and unfloored
37.74%
6.6%
31.60%
243.5%
25.46%
491.0%
20.30%
930.5%
15.41%
1249.8%10.39%
1250.0%8.36%
1250.0%0.00%
1250.0%

CMA

Benelux RMBS 1

Attachment uncapped and unfloored
8.30%
0.4%
6.90%
47.2%
4.40%
138.9%
1.60%
573.7%
0.00%
1238.3%

CMA

Attachment uncapped and unfloored
36.50%
0.0%
0.00%
307.2%

CMA

Attachment uncapped and unfloored
18.22%
0.0%
14.73%
0.0%
13.23%
0.1%
0.00%
207.8%

CMA

Attachment uncapped and unfloored
6.67%
0.2%
2.00%
189.3%
0.00%
1088.8%CMA

A
B
C
French Auto
Parts APart B
Fonds de Reserve
EquityAttachment uncapped and unfloored21.68%
0.0%
1.48%
104.4%
0.00%
1250.0%0.00%
1250.0%

CMA
0.0%
40.9%
939.1%
1250.0%0.0%
132.8%
1182.8%1250.0%

CMA
0.0%
85.7%
1172.7%1250.0%

CMA
0.0%
86.3%
1164.2%1250.0%

CMA
0.0%
94.7%
1050.0%1250.0%

Attachment uncapped and unfloored
23.77%
545.0%
0.00%
1250.0%CMA
322.4%
1225.3%

CMA
840.1%
1250.0%CMA
673.7%
1248.5%

CMA
674.6%
1245.3%

CMA
681.7%
1222.8%A
B
C
D
E
Italian SME
AB
UK RMBSClass-AClass-M
N
B
Benelux RMBS 2

US Subprime RMBS
A
B

23.7%
879.8%
1237.8%44.8%
588.3%
814.9%
1018.3%1152.3%1232.5%3.2%
131.0%
330.2%
584.8%
831.4%
1045.3%1159.2%1232.6%

0.1%
10.3%
39.2%
217.8%
830.0%

0.0%
253.5%

0.0%
0.0%
0.0%
105.2%

0.0%
57.5%
654.0%

CMA

1.1%
82.2%
203.3%
578.5%
1106.5%CMA
0.0%
506.9%
CMA
0.0%
0.0%
0.3%
210.4%
CMA
0.4%
241.3%
994.9%CMA

Annex 13 – Capital requirements cap based on retained economic interest(IRB Approach)
We understand that the addition of the overall cap aims to provide with more conservative capital requirements foran originator bank, which should not be required to hold more capital after securitisation than before.
The proposal of the Committee of a pro rata calculation of the maximum capital requirement, where a bankdetermines its maximum capital requirement by multiplying the largest proportion of interest that the bank holds
for each tranche by the capital charge of the underlying pool is in our view a positive achievement compared to the
BCBS 236 proposal where the cap was simply on the total capital charge of the underlying portfolio.
However, we believe that the idea of capital neutrality for originators, which underlies this proposal, is only partiallytranscribed by this computation, especially when an originator bank achieves significant risk transfer and net
economic interest retention in the transaction at the same time.
We believe that in order to avoid any regulatory arbitrage and to provide with more conservative capital charge foran originator bank the overall cap should be computed by multiplying the percentage of economic interest hold by
the originator bank by the capital charge of the underlying pool.
CRR Net economic interest retention rules (Art. 405) claims for an overall cap proportional to the underlying
portfolio capital charge for originators:
An originator willing to attract investors regulated by CRR has to retain at least 5% of net economic interest in the
securitisation. Under CRR Art. 405, this can be achieved through vertical retention of 5% of each tranches or throughrandom selection of 5% of the assets to be transferred to the SPV.
If the option of random selection is chosen, the capital charge for the originator after securitisation would equal 5%of the portfolio before securitisation (assuming a granular pool), whereas the capital charge after securitisation
would be greater with the vertical retention option.
For instance, let us assume a French RMBS structure aiming risk transfer. The risk parameters of the underlying poolare estimated under the IRB approach and are reflective from the average good quality of the French residential
book:
N parameter
EAD
WA 1 year PD
WA LGDEL
RWA
Kirb

10,0001,000 M€
1.5%
15.0%
2.3 M€
100.0 M€
10.3 M€

For the purpose of the example, we assume a tranching similar to the one achieved by Orange Lion 2013-10, which isa €2bn Dutch prime RMBS transaction issued in July 2013, where the originator has achieved sale of all credit risk inthe underlying portfolio to external investors.
The IRB approach would be applied for the capital charge computation of the securitised exposures (retailparameters). If we assume a vertical 5% retention of all the tranches:

708763167

ClassA
B
C
D
E
F

Attachment Detachment Maturity
%
point
point
(Y)
Retention
9.1%
6.4%
4.1%
2.2%
0.5%
0.0%

100.0%
9.1%
6.4%
4.1%
2.2%
0.5%

5
5
5
5
5
5

5%
5%
5%
5%
5%
5%

p

KSSFA

TrancheRW (%)

123%
137%
137%
137%
137%
137%

0.0%
1.0%
5.6%
24.3%
68.8%
121.1%

15.0%
15.0%
70.1%
303.9%
984.1%
1250.0%Tranche
CapitalRWA
charge for(Originator) Originator
136 M€7 M€
0.5 M€
4 M€
0 M€
0.0 M€
16 M€
1 M€
0.1 M€
59 M€
3 M€
0.2 M€
162 M€8 M€
0.6 M€
63 M€
3 M€
0.3 M€
441 M€22 M€
1.8 M€

TrancheRWA (total)

Under such an example and without the overall cap, the originator would have a capital charge of 1.8 M€ after
securitisation, equal to 5% of the total capital charge of the tranches, which should reflect 5% of the risks of theunderlying portfolio, whereas the 5% share of the portfolio risks would actually equal 0.5 M€ if it was directlycomputed on the capital charge of the underlying portfolio (5%*10.3 M€).
Despite the transfer of 95% of the net economic interest to external investors, the originator would proportionallyhave more capital charge after securitisation than before if no overall cap based on the underlying portfolio’s capital
was applied.
This example claims for an overall cap based on the capital charge of the underlying pool since it would create a
discrepancy between the two options permitted by the CRR regulation to achieve the net economic interest
retention.
This first example leads also to the fact that the overall cap for an originator should be computed as themultiplication of the capital charge of the underlying pool by the economic interest retention proportion insteadof the maximum proportion of retention of all the tranches.
Indeed, the proposed overall cap could create an incentive for originator to transfer the riskiest tranches of thestructure. For instance, let us consider the same structure as in the first example, but where 20% retention isachieved on the mezzanine tranches C and D:
Retention structure n°1 :

Class
A
B
C
D
E
F

Attachment Detachment Maturity
%
point
point
(Y)
Retention
9.1%
6.4%
4.1%
2.2%
0.5%
0.0%

100.0%
9.1%
6.4%
4.1%
2.2%
0.5%

5
5
5
5
5
5

5%
5%
20%
20%
5%
5%

p

KSSFA

Tranche
RW

123%
137%
137%
137%
137%
137%

0.0%
1.0%
5.6%
24.3%
68.8%
121.1%

15.0%
15.0%
70.1%
303.9%
984.1%
1250.0%Tranche
CapitalRWA
charge for(Originator) Originator
136 M€7 M€
0.5 M€
4 M€
0 M€
0.0 M€
16 M€
3 M€
0.3 M€
59 M€
12 M€
0.9 M€
162 M€8 M€
0.6 M€
63 M€
3 M€
0.3 M€
441 M€33 M€
2.7 M€

TrancheRWA (total)

The overall cap computed as the maximum retention of each tranches multiplied by the underlying pool capitalwould equal 2.05 M€ (20%*10.3 M€). This overall cap would be exactly the same if the 20% retention was on themost junior tranches E and F as follow:

2708763167

Retention structure n°2:

Class
A
B
C
D
E
F

Attachment Detachment Maturity
%
point
point
(Y)
Retention
9.1%
6.4%
4.1%
2.2%
0.5%
0.0%

100.0%
9.1%
6.4%
4.1%
2.2%
0.5%

5
5
5
5
5
5

5%
5%
5%
5%
20%
20%

p

KSSFA

Tranche
RW

123%
137%
137%
137%
137%
137%

0.0%
1.0%
5.6%
24.3%
68.8%
121.1%

15.0%
15.0%
70.1%
303.9%
984.1%
1250.0%Tranche
CapitalRWA
charge for(Originator) Originator
136 M€7 M€
0.5 M€
4 M€
0 M€
0.0 M€
16 M€
1 M€
0.1 M€
59 M€
3 M€
0.2 M€
162 M€32 M€
2.6 M€
63 M€
13 M€
1.0 M€
441 M€56 M€
4.5 M€

TrancheRWA (total)

In order to avoid any regulatory incentive, we believe that the overall cap should be computed as the capital chargeof the underlying pool (10.3 M€) multiplied by the percentage of economic interest retained by the originator after
securitisation. This percentage of economic retention should be seen as the RWA after securitisation retained by
the originator divided by the total RWA after securitisation.
With the overall cap computation proposed by the Committee, the retention structure n°1 and n°2 would be
exactly the same from an originator capital charge point of view: the overall cap would equal 2.05 M€, whereas
the retention of risk is not the same. Our proposal to compute the cap on the % of economic retention would leadin our view to more conservative capital charge for the originator and to a more continuous overall cap:
Retention
Retention
structure n°1 structure n°2
Ki rb (A)RWA reta i ned by ori gi nator after
securi ti s a ti on (B)10.3 M€

10.3 M€

33.3 M€

56 M€

Tota l RWA a fter s ecuri ti s a ti on (C )440.5 M€

440.5 M€

7.56%

12.66%

0.8 M€

1.3 M€% of ori gi na tor economi c i nteres t(D = B/C)
Overall Cap ( A * D)***

3708763167

Illustration of Program Wide Credit Enhancement treated as Resecuritization

Number of securitizations transactions in the eligible ABCP conduit
Mapped rating of securitization transactions
Size of each securitization transaction
RWA % for each securitization transaction
Liquidity Agreement Factor
Total Notional of Liquidity Facilities% of program-wide credit enhancement
Notional of program-wide credit enhancement

Annex 14
Current Basel III
Resecuritization
Language
10
AAA
$100
15%
102%
$1,00010%$100(A) Calculation of RWA for program-wide C/E
KSA (assuming 15% RWA for the underlying securitizations)
RW using standardized approach (p=1.5)
RWA

1.2%
373%
$373

(B) Calculation of securitization RWA for the liquidity facilities
102% x Notional of liquidity facilities x 15%
90% x 102% x Notional of liquidity facilities x 15%$138

Total RWA (A) + (B)$511

Maximum
Aggregate Capital
Requirement

$153

$153

Annex 15 – Calculation of Additional Risk Weights(This transcription omits wording that relates to the risk retention requirement andexemptions from it and not to the due diligence requirement.)
From CRR:
Article 407
Additional risk weight
Where an institution does not meet the requirements in Article … 406 [(Due diligence)] … inany material respect by reason of the negligence or omission of the institution, the competentauthorities shall impose a proportionate additional risk weight of no less than 250 % of therisk weight (capped at 1 250 %) which shall apply to the relevant securitisation positions in
the manner specified in Article 245(6)1 [(Calculation of risk-weighted exposure amounts)] or
Article 337(3) [(Trading book – Own funds requirement for securitisation instruments)]
respectively. The additional risk weight shall progressively increase with each subsequent
infringement of the due diligence provisions.
[…]
From European Banking Authority (EBA) Final Draft Implementing Technical Standards
Relating to the convergence of supervisory practices with regard to the implementation of
additional risk weights (Article 407) of Regulation (EU) No 575/2013 (17 Dec. 2013):
Article 2 – Calculation of additional risk weight
1. Competent authorities shall apply the following formula to determine the total risk weight('Total RW') in accordance with the approach specified in Articles 245(6) and 337(3) ofRegulation (EU) No 575/2013 to be applied where an institution does not meet the relevant
requirements in any material respect:
Total RW = Min[12.5 ; Original RW * (1 + (2.5 + 2.5 * InfringementDurationyears) …)]
Where:
12.5 is a factor representing the maximum value that the total risk weight can reach;
Original RW is the risk weight that would apply to the securitisation positions if no additionalrisk weight was imposed;
2.5 is the minimum factor applying to the original risk weight in order to calculate theadditional risk weight;
InfringementDurationyears is the duration of the infringement, expressed in years, rounded
down to the nearest 12-month period. This variable is equal to "0" for an infringement of lessthan 12 months, equal to "1" for an infringement of more than 12 months but less than 24
months, equal to "2" for an infringement of more than 24 months but less than 36 months,
1"The total risk weight shall be determined as the sum of the risk weight set out in this Chapter [5(Securitisation)] and any additional risk weight in accordance with Article 407."

708697613

etc. The duration shall generally be measured from the start of the infringement for the
securitisation, although competent authorities, taking account of the specificities of the
securitisation, may impose other starting points. 'Infringement' shall mean the breach of one
or more of the requirements capable of triggering an additional risk weight. The infringement
shall turn into a 'subsequent infringement' when time passes without rectifying theinfringement, leading to a progressive increase of the additional risk weight.
[…]

7086976132