Basel Committee Proposes Simple, Transparent and Comparable Securitisation Framework for Short-Term Securitisations
On July 6, 2017, the Basel Committee on Banking Supervision (“BCBS”) issued two consultative documents entitled “Criteria for Identifying Simple, Transparent and Comparable Short-Term Securitisations” (the “Criteria Document”) and “Capital Treatment for Simple, Transparent and Comparable Short-Term Securitisations” (the “Capital Document” and, together with the Criteria Document, the “Consultative Documents”). The Criteria Document can be found here and the Capital Document can be found here. BCBS had previously published criteria for identifying simple, transparent and comparable (“STC”) term securitisations in July of 2015 (the “STC Term Securitisation Criteria”) and in July of 2016 published revisions to its securitisation capital framework (the “Revised Capital Framework”) that incorporated the regulatory capital framework for STC term securitisations.
Comments are due on the Consultative Documents on October 5, 2017.
The STC Term Securitisation Criteria and Revised Capital Framework explicitly excluded short-term securitisations, including asset-backed commercial paper (“ABCP”) programs. It was mentioned, however, that BCBS and IOSCO would separately consider whether specific criteria for exposures to ABCP programs should be issued.
While a significant portion of the bank-financed securitisation market has migrated to direct bank funding of customer securitisation transactions, the use of the proposed short-term STC criteria would be limited to exposures to qualifying ABCP conduits. ABCP programs are defined as programs that predominantly issue (i) commercial paper with a maturity of one year or less, or (ii) notes to third parties backed by assets or loans held in a bankruptcy remote special purpose entity.
The Criteria Document sets forth 17 criteria for STC securitisations that are focused primarily on investors in ABCP. The Capital Document supplements the 17 criteria with more specific requirements and adds two additional criteria and provides for more favorable capital treatment for exposures to qualifying ABCP conduits for both investors and sponsors. The criteria address asset risk and quality, structural risk, and fiduciary and servicer risk. A chart summarizing these criteria is attached as Exhibit A.
For notes issued by ABCP conduits that meet the short-term STC capital criteria, capital would equal that of STC risk positions of comparable maturity in the Revised Capital Framework. For ABCP investors applying the internal ratings‑based (“IRB”) approach, the risk weight would be determined by applying a 0.5 scalar to the “p” factor with a “p” factor floor of 0.3, and a risk weight floor of 10% for senior positions and 15% for other positions. Investors using the external ratings-based (“ERB”) approach to determining capital would apply the following risk weights:
External credit assessment
All other ratings
Risk weight for STC exposures (both term securitisations and ABCP)
Banks providing credit or liquidity funding to qualifying ABCP conduits are treated as if they had taken a risk position in an STC term securitisation, and the capital treatment would follow the capital treatment for STC term securitisations in the Revised Capital Framework. As is the case with investors in ABCP for a qualifying conduit, the risk weight would be determined by applying a 0.5 scalar to the “p” factor with a “p” factor floor of 0.3, and a risk weight floor of 10% for senior positions and 15% for other positions. For banks applying the ERB approach or the Internal Assessment Approach, the risk weight applicable to an equivalent position in an STC term securitisation would be use
Qualifying swap positions that are exposures to ABCP conduits meeting the short-term STC capital criteria would also be eligible for more favorable risk weights.
Importantly, the Consultative Documents take an “all or nothing” approach to qualifying for STC status and capital treatment. All of the conduit level and transaction level criteria must be met for all transactions in an ABCP conduit, except that an ABCP conduit need not be fully supported in order for STC capital treatment to apply to exposures of the sponsor bank to the ABCP conduit. BCBS does raise the possibility of separating conduit level and transaction level capital treatment in a final standard and has asked for comment on this issue.
As written it appears that no multi-seller ABCP conduit of which we are aware would qualify for more favorable treatment. Among other issues:
- The all or nothing aspect of the requirements would mean that every transaction would need to qualify for more favorable treatment, which is extremely unlikely.
- The conduit level criteria impose fiduciary-type obligations on conduit sponsors which are not likely imposed under current conduit structures and require sponsors to make representations and warranties to investors that are not currently being made.
- The investor reporting required in the Consultative Documents would appear to impose an obligation on the sponsor to disclose substantially more information regarding the underlying transactions financed by the ABCP conduit than is current practice.
- A qualifying ABCP conduit could only finance receivables of asset originators with relatively long track records of originating and servicing the financed assets, and not all existing asset originators may so qualify.
- All assets financed by a qualifying ABCP conduit must meet certain specific credit quality requirements. This would preclude many trade receivables transactions and other revolving asset pools from being financed by a qualifying ABCP conduit.
We have marked the provisions of the criteria that seem problematic for existing conduits in red on Appendix A.