Operational Requirements for Use of External Credit Assessments
The external credit assessment used for determining the applicable risk weight for a
CR Exposuremust be determined by taking into account the entire amount of Credit Risk(principal and interest) an Authorised Firmis exposed to.
Credit assessments can only be considered from an
ECAI, and must meet the following criteria:(a) any credit assessments used for the purposes of risk weighting must be publicly available;(b) the external credit rating agencies must have expertise and market acceptance in rating securitisations of the nature being used for risk weighting purposes;(c) Authorised Firmsmust apply external credit rating agency ratings consistently to all tranches of securitisations;(d) where an Exposurehas two ratings from external credit rating agencies the less favourable rating must be used; and(e) where an Exposurehas more than two assessments by external credit rating agencies the two most favourable ratings can be selected, the review of these assessments is then determined in line with (d).
Credit Riskmitigation has been considered as part of any rating applied to a tranche of a securitisation, the risk weighting should be used and no additional capital recognition is permitted.
Authorised Firmmust treat any securitisation Exposureas an unrated Exposurewhere:(a) the external credit assessment incorporates the credit protection provided directly to the SPE by a protection provider which is not an eligible protection provider;(b) the external credit assessment is at least partly based on unfunded support provided by the Authorised Firmitself (e.g. if an Authorised Firmbuys ABCP) where it provides an unfunded securitisation Exposureextended to the ABCP Programme, such as a liquidity facility or Credit Enhancement, and that Exposureplays a role in determining the credit assessment on the ABCP, the Authorised Firmmust treat the ABCPas if it were not rated and continue to hold capital against the other securitisation Exposuresit provides);(c) the Credit Riskmitigant is not obtained by the SPE but is separately obtained and applied to a specific securitisation Exposure(e.g. a particular tranche); or(d) the Credit Riskmitigation does not meet the eligibility criteria for mitigation specified in PIB section 4.13.
Credit Riskmitigation is applied to a specific Exposurewithin a securitisation the Authorised Firmmust treat the Exposureas unrated, and then use the mitigation as set out in PIB section 4.13 should the Rulescontained in that section apply.
Authorised Firmmust not use an external credit rating agency rating for risk weighting purposes where the assessment is at least partly based on unfunded support provided by the Authorised Firmitself.
The treatment outlined in PIB Rule 4.14.24 also applies to
Exposuresin the Authorised Firm's Trading Book. An Authorised Firm's Capital Requirementfor such Exposuresheld in the Trading Bookcan be no less than the amount required under the Non-Trading Book.