§ 217.141 Operational criteria for recognizing the transfer of risk. ( a ) *Operational criteria for traditional securitizations.* A Board-regulated institution that transfers exposures it has originated or purchased to a securitization SPE or other third party in connection with a traditional securitization may exclude the exposures from the calculation of its risk-weighted assets only if each of the conditions in this paragraph (a) is satisfied. A Board-regulated institution that meets these conditions must hold risk-based capital against any securitization exposures it retains in connection with the securitization. A Board-regulated institution that fails to meet these conditions must hold risk-based capital against the transferred exposures as if they had not been securitized and must deduct from common equity tier 1 capital any after-tax gain-on-sale resulting from the transaction. The conditions are: ( 1 ) The exposures are not reported on the Board-regulated institution's consolidated balance sheet under GAAP;
( 2 ) The Board-regulated institution has transferred to one or more third parties credit risk associated with the underlying exposures;
( 3 ) Any clean-up calls relating to the securitization are eligible clean-up calls; and
( 4 ) The securitization does not: ( i ) Include one or more underlying exposures in which the borrower is permitted to vary the drawn amount within an agreed limit under a line of credit; and
( ii ) Contain an early amortization provision.
( b ) *Operational criteria for synthetic securitizations.* For synthetic securitizations, a Board-regulated institution may recognize for risk-based capital purposes under this subpart the use of a credit risk mitigant to hedge underlying exposures only if each of the conditions in this paragraph (b) is satisfied. A Board-regulated institution that meets these conditions must hold risk-based capital against any credit risk of the exposures it retains in connection with the synthetic securitization. A Board-regulated institution that fails to meet these conditions or chooses not to recognize the credit risk mitigant for purposes of this section must hold risk-based capital under this subpart against the underlying exposures as if they had not been synthetically securitized. The conditions are: ( 1 ) The credit risk mitigant is: ( i ) Financial collateral; or
( ii ) A guarantee that meets all of the requirements of an eligible guarantee in § 217.2 except for paragraph (3) of the definition; or
( iii ) A credit derivative that meets all of the requirements of an eligible credit derivative except for paragraph (3) of the definition of eligible guarantee in § 217.2.
( 2 ) The Board-regulated institution transfers credit risk associated with the underlying exposures to third parties, and the terms and conditions in the credit risk mitigants employed do not include provisions that: ( i ) Allow for the termination of the credit protection due to deterioration in the credit quality of the underlying exposures;
( ii ) Require the Board-regulated institution to alter or replace the underlying exposures to improve the credit quality of the underlying exposures;
( iii ) Increase the Board-regulated institution's cost of credit protection in response to deterioration in the credit quality of the underlying exposures;
( iv ) Increase the yield payable to parties other than the Board-regulated institution in response to a deterioration in the credit quality of the underlying exposures; or
( v ) Provide for increases in a retained first loss position or credit enhancement provided by the Board-regulated institution after the inception of the securitization;
( 3 ) The Board-regulated institution obtains a well-reasoned opinion from legal counsel that confirms the enforceability of the credit risk mitigant in all relevant jurisdictions; and
( 4 ) Any clean-up calls relating to the securitization are eligible clean-up calls.
( c ) *Due diligence requirements for securitization exposures.* ( 1 ) Except for exposures that are deducted from common equity tier 1 capital and exposures subject to § 217.142(k), if a Board-regulated institution is unable to demonstrate to the satisfaction of the Board a comprehensive understanding of the features of a securitization exposure that would materially affect the performance of the exposure, the Board-regulated institution must assign a 1,250 percent risk weight to the securitization exposure. The Board-regulated institution's analysis must be commensurate with the complexity of the securitization exposure and the materiality of the position in relation to regulatory capital according to this part.
( 2 ) A Board-regulated institution must demonstrate its comprehensive understanding of a securitization exposure under paragraph (c)(1) of this section, for each securitization exposure by: ( i ) Conducting an analysis of the risk characteristics of a securitization exposure prior to acquiring the exposure and document such analysis within three business days after acquiring the exposure, considering: ( A ) Structural features of the securitization that would materially impact the performance of the exposure, for example, the contractual cash flow waterfall, waterfall-related triggers, credit enhancements, liquidity enhancements, fair value triggers, the performance of organizations that service the position, and deal-specific definitions of default;
( B ) Relevant information regarding the performance of the underlying credit exposure(s), for example, the percentage of loans 30, 60, and 90 days past due; default rates; prepayment rates; loans in foreclosure; property types; occupancy; average credit score or other measures of creditworthiness; average loan-to-value ratio; and industry and geographic diversification data on the underlying exposure(s);
( C ) Relevant market data of the securitization, for example, bid-ask spreads, most recent sales price and historical price volatility, trading volume, implied market rating, and size, depth and concentration level of the market for the securitization; and
( D ) For resecuritization exposures, performance information on the underlying securitization exposures, for example, the issuer name and credit quality, and the characteristics and performance of the exposures underlying the securitization exposures; and
( ii ) On an on-going basis (no less frequently than quarterly), evaluating, reviewing, and updating as appropriate the analysis required under this section for each securitization exposure.