EBA is consulting on the draft guidelines on determination of weighted average maturity (WAM) of the contractual payments due under the tranche of a securitization transaction, as per Article 257(1) (a) of the Capital Requirements Regulation (CRR). These draft guidelines aim at ensuring that the methodology applicable for the determination of the WAM for regulatory purposes is sufficiently harmonized to increase consistency and comparability in the own funds held by institutions. The consultation period ends on October 31, 2019.
CRR mandates EBA to monitor the range of practices in this area, particularly with regard to the measurement of the maturity of a tranche as the WAM of the contractual payments due under the tranche, and issue these guidelines by December 31, 2019. Overall, the draft guidelines cover the following key areas:
- Meaning of contractual payments due under the tranche
- Data and information requirements
- Methodologies for determining the contractual payments of the securitized exposures and of the tranches, both for traditional and synthetic securitization
- Implementation and use of the WAM model
The revised CRR framework for securitization introduced the maturity of the tranche as an additional risk factor to take into account when calculating the capital requirement of securitization exposures. Two alternative approaches could be applied when determining the maturity of a tranche: the WAM of the contractual payments due under the tranche or the final legal maturity of the tranche. These draft guidelines provide the guiding principles for institutions opting for the WAM approach, instead of the final legal maturity approach. This is done to calculate the risk weighted exposure amounts of a securitization position via the methods that use the maturity of the tranche as a risk factor, namely the Internal Ratings Based Approach for calculating risk-weighted exposure amounts of a securitization position (SEC-IRBA) and external Ratings Based Approach for calculating risk-weighted exposure amounts of a securitization position (SEC-ERBA).
In case of traditional securitizations, these guidelines set out that the contractual payments due under the tranche should be understood to mean the combination of the contractual payments of the underlying exposures payable to the securitization special purpose vehicle (SSPE) and the contractual payments payable by the SSPE to the tranche holders. In case of synthetic securitizations, these guidelines set out that the contractual payments due under the tranche should be understood to mean (both in the perspective of the originator and in the perspective of the protection provider calculating the WAM) the contractual payments of premia payable by the originator to the protection provider. The guidelines also contain provisions on the asset model applicable to the pool of securitized exposures to determine their outstanding balance throughout the life of the protection and the corresponding size of the protected tranches, which is the base for the calculation of those premia that are contingent on that size. Finally, these guidelines set out the requirements on the data on the underlying pool of assets and on the securitization transaction for the institutions to be able to calculate the WAM of a tranche; the use of third-party data and model providers; and further requirements on the implementation and use of the WAM approach.
Comment Due Date: October 31, 2019
Keywords: Europe, EU, Banking, Securitization, SEC-ERBA, SEC IRBA, CRR, Weighted Average Maturity, Securitization Tranches, Basel III, EBA
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