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    EBA Issues Guidelines to Determine WAM Under A Securitization Tranche

    May 04, 2020

    EBA published the final guidelines on determination of the weighted average maturity (WAM) of the contractual payments due under the tranche of a securitization transaction, as laid down in the Capital Requirements Regulation (CRR). These guidelines will help institutions using the internal or the external rating-based approach (SEC-IRBA or SEC-ERBA, respectively) and opting for the use of WAM approach, instead of the final legal maturity approach, when calculating their capital requirements. The guidelines shall apply from September 01, 2020.

    The maturity of the tranche is an additional parameter introduced by the revised Securitization Regulation that is needed by institutions using the SEC-IRBA or the SEC-ERBA for the calculation of the risk-weighted exposure amounts of their securitization positions. The main areas covered by the guidelines are the following:

    • Meaning of contractual payments due under the tranche
    • Data and information requirements
    • Methodologies for determining the contractual payments of the securitized exposures due under the tranche both for traditional and synthetic securitizations
    • Implementation and use of the weighted average maturity model

    Additionally, the guidelines provide clarifications regarding the data requirements, particularly with regard to the use of external data and third-party data and model providers. They also set out the expectations about the review and the implementation of the weighted average maturity model. Given the different source of cash flows generated within traditional and synthetic securitizations, the guidelines provide two different methodologies for calculating the weighted average maturity of a tranche:

    • In case of a traditional securitization, the contractual payments due under the tranche should be understood as the combination of the contractual payments of the underlying exposures payable to the securitization special purpose entity (SSPE) and the contractual payments payable by the SSPE to the tranche holders. To calculate these payments, the guidelines specify how institutions should rely on the asset model to calculate the contractual payments due by the borrowers of the underlying exposures and which inputs should be considered in the liability model to calculate the contractual payments payable by the SSPE to the tranche holders.
    • In case of a synthetic securitization, the contractual payments due under the tranche should be understood as the sum of the contractual payments of the premia payable by the originator to the protection provider and the contractual payments received by the originator from the borrowers of the underlying exposures that are allocated to the reduction of the outstanding amount of the tranche, provided that the transaction documentation is clear enough to allow such allocation. Following this interpretation, these guidelines contain provisions on the asset model applicable to the pool of securitized exposures to determine the contractual payments to be allocated to the reduction of the outstanding amount of the tranches used in the calculation of the premia. 

     

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    Keywords: Europe, EU, Banking, Securitization, CRR, Weighted Average Maturity, Basel III, SEC-IRBA, SEC-ERBA, Securitization Regulation, EBA

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