Worldwide: Revisions To Basel Securitisation Framework—Final Rules

Keywords: Basel Committee, Banking Supervision, Basel III

On 11 December 2014, the Basel Committee on Banking Supervision (BCBS) published a final Basel III Document (BCBS d303)1 on changes to the international model rules for banks' calculation of credit risk capital requirements for exposures to securitisation transactions (Revised Framework). The Revised Framework follows the BCBS's first consultative document on this subject (BCBS 236) published in December 2012,2 and its second consultative document (BCBS 269), published in December 2013 (Second Proposal),3 and includes the text of the Revised Framework that will replace the securitisation framework set out in the Basel II capital requirements framework as amended.4 The Revised Framework is to be implemented by BCBS member countries by the beginning of 2018.

Overall, the Revised Framework is very similar to the draft rules set out in the Second Proposal, though there are some significant changes as discussed below. Main elements are as follows:

  • To determine its credit risk capital requirement for a securitisation exposure, a bank will apply one of several approaches according to the following hierarchy (if the bank meets the applicable conditions to apply that approach to that exposure):

    • an Internal Ratings-Based Approach (IRBA) based on the internal ratings-based approach (IRB) capital charge for the underlying securitised exposures (KIRB);
    • where permitted under the laws of the bank's jurisdiction, either an External Ratings-Based Approach (ERBA), which determines risk weights based on qualifying credit rating agency ratings and other variables, or, in the case of unrated exposures to asset-backed commercial paper (ABCP) conduits, the Internal Assessments Approach (IAA) from the Basel II IRB; or
    • a Standardised Approach (SEC-SA), which determines risk weights using a relatively simple formula applied to the capital requirement for the underlying assets determined under the Basel II standardised approach (SA).

If the bank is not able to apply any of these approaches to a particular securitisation exposure, then generally it must assign a 1,250% risk weight to the exposure.

  • Regardless of the approach used, the capital requirement for any securitisation exposure will be subject to a 15% risk weight floor (except that a lower risk weight may apply if the maximum risk weight or maximum capital requirement provisions are applicable and give a lower risk weight according to the weighted average risk weight or the capital requirement of the underlying pool of exposures).
  • Under both the IRBA and the ERBA, risk weights will vary according to maturity of the securitisation exposure, with a minimum of one year and a maximum of five years. For this purpose, the tranche maturity will be determined based on mandatory contractual cash flows of the securitisation tranche rather than contractual or expected cash flows of the underlying assets.
  • Based on the ERBA risk weights and other statements in the Revised Framework, risk weights under the Revised Framework for relatively high quality securitisation tranches (and especially those not having short contractual maturities) will in general be substantially higher than under the Basel II IRB.

The hierarchy and characteristics of approaches used to determine the credit risk capital requirement and certain other changes from Basel II included in the Revised Framework are described in more detail in our previous legal update on the Second Proposal.5

Changes from Second Proposal

While the Revised Framework generally follows the Second Proposal, it includes the following significant changes:

  • In response to comments that the use of legal final maturity of securitisation tranches (rather than contractual maturity or weighted average life of underlying assets) is unduly conservative, the BCBS adjusted the definition of maturity to "haircut" the legal final maturity.6 Rather than being equal to legal final maturity, tranche maturity will equal one year plus 80% of the excess of legal final maturity over one year.7 For example, if the legal final maturity of a tranche is two years, its tranche maturity under the Revised Framework will be 1.8 years, and if the legal final maturity a tranche is five years, its tranche maturity will be 4.2 years. In addition, in the ERBA risk weight table for long-term ratings, the risk weights prescribed for five year maturities (except for very low-rated tranches) are moderately lower than those in the Second Proposal.8 For any exposure with a legal final maturity longer than one year and not longer than six years, under IRBA or ERBA, other things being equal, these changes will result in somewhat lower capital requirements than under the Second Proposal.
  • To enable banks that use the IRB approach to apply IRBA to more of their securitisation exposures, the Revised Framework adapts the "top-down" approach set out in Basel II for purchased receivables so that banks can use it for securitisation exposures generally, subject to some conditions.9 At the same time, the Revised Framework requires banks to recognise dilution risk, and not only credit risk, in calculating capital requirements for securitisation exposures, unless a bank can demonstrate to its supervisor that the dilution risk is immaterial.10 In Basel II, assessment of dilution risk is required in the purchased receivables provisions,11 in credit risk mitigation provisions on using receivables as collateral,12 and in the IAA for ABCP conduit exposures,13 but not in the securitisation framework generally.
  • As to "mixed pools," as to which a bank can determine IRB inputs for some, but not all, the underlying exposures, the Revised Framework will allow the bank to apply the IRBA (using IRB inputs where available and SA risk weights for the remaining exposures) only if the bank can determine IRB inputs for at least 95% of the exposures. Otherwise, the bank must apply the ERBA (where allowed), the IAA (if applicable) or, if the bank cannot apply the ERBA or the IAA, the SEC-SA.14 This replaces the Basel II rule which allowed a bank to calculate capital based on KIRB of the underlying pool of exposures if it could apply the IRB approach to a "predominant share" of those exposures.15 Similarly, under the Revised Framework, in order to apply the SEC-SA to a securitisation position, a bank must know the delinquency status for at least 95% of the underlying exposures; otherwise it must assign a 1,250% risk weight to that position.16
  • A bank that holds an unrated securitisation exposure under an interest rate or currency swap may apply a risk weight to that exposure according to the risk weight for a pari passu position, and not only (as under Basel II) for a position that is fully subordinated to the unrated exposure.17 More generally, for any unrated securitisation position, a rating may be inferred from the rating of either a rated pari passu tranche or, if there is no pari passu tranche, a rated subordinated tranche.18
  • The capital requirements cap (under which a bank's capital requirement will not exceed the capital requirement for the underlying pool of exposures if they were all held by the bank directly) will be applied proportionally based on the largest portion of any tranche held by the bank.19 For example, if the bank's capital requirement for the underlying exposures would be 100 and the bank holds 25% of a senior tranche and 20% of a junior tranche, if the bank is allowed to apply the capital requirements cap, the bank's aggregate capital requirement for those securitisation positions will not exceed 25.
  • For any resecuritisation exposure (that is, an exposure to a securitisation in which any underlying exposure is a securitisation exposure), the risk weight will not be less than 100% (vs. 20% under Basel II.5),20 and will not be limited by the risk weight and capital requirements caps that apply to other securitisation exposures.21
  • The definition of "ABCP programme" is amended to say that such a programme predominantly issues commercial paper "to third party investors."22 If "predominantly" is to be read to mean a very high percentage (like the 95% applied to information requirements in the IRBA and SEC-SA), then this change could prove challenging for banks that wish to use the IAA (other than banks in the US where the IAA is not available) in relation to their ABCP conduit programmes and that also need to buy commercial paper or otherwise provide funds to the conduit in order to comply, for example, with US risk retention requirements.
  • The provisions on "overlapping exposures" have been amended to clarify the meaning of that term and to allow a bank to "split or expand" exposures in appropriate cases to arrive at an overlap for purposes of calculating the capital requirements.23 The amended provisions should help avoid anomalous results for banks providing both liquidity facilities and programme enhancement facilities to ABCP conduits.
  • While maintaining that "[f]or structures involving [a special purpose entity (SPE)], all the SPE's exposures are to be treated as exposures in the pool," the Revised Framework allows that "the bank can exclude the SPE's exposures from the pool for capital calculation purpose if the bank can demonstrate to its national supervisor that the risk of the SPE's exposures is immaterial (for example, because it has been mitigated [footnote omitted]) or that it does not affect the bank's securitisation exposure."24 For example, provisions for cash collateralisation and counterparty credit quality standards could reduce or eliminate the SPE's exposure to credit risk of the SPE's swap counterparty, and (if accepted by the bank's national supervisor) could thus enable a bank to exclude that counterparty credit risk when calculating its credit risk capital requirement for investment in the SPE's asset-backed notes.25
  • The definitions of attachment point (A) and detachment point (D) have been amended, among other things, to clarify the treatment of reserve accounts.26 Wording has also been added to clarify that sequential-pay tranches are aggregated for purposes of calculating A and D.27

Joint Associations' Comments and Results

Some of the changes from the Second Proposal that are reflected in the Revised Framework respond in whole or part to comments made by a number of financial industry associations on the Second Proposal.28 However, many of the associations' most important comments, including proposals to recalibrate the IRBA, ERBA and SEC-SA with different inputs for different asset classes, were not adopted. The Annex attached to this legal update sets out the joint associations' main comments on the Second Proposal and the results found in the Revised Framework.

What Happens Next?

Concurrently with the Revised Proposal, the BCBS, together with the Board of the International Organization of Securities Commissioners (IOSCO), published a consultative document on "Criteria for identifying simple, transparent and comparable securitisations ,"29 requesting comments by 13 February 2015. This follows a consultation by the European Banking Authority on "simple standard and transparent securitisations"30 and, during 2014, among other developments, the publication by the Bank of England and the European Central Bank of a discussion paper setting out draft principles for "qualifying securitisations" and the adoption by the European Commission (EC) of delegated regulations providing relatively favourable treatment of securitisations meeting certain criteria for purposes of the Basel III liquidity coverage ratio as in effect in the European Union31 and for purposes of insurance company capital requirements.32

If the BCBS and IOSCO, following their consultation, adopt criteria for defining a "qualifying securitisation" (or whatever term is used), they will probably recommend that transactions meeting those criteria will be entitled to more favourable treatment for certain regulatory purposes, including possibly for purposes of bank capital requirements. The BCBS, in its Introduction to the Revised Framework, referred to the BCBS/IOSCO consultation and said that in 2015 the BCBS "will consider how to incorporate such criteria into the securitisation capital framework."33 This will provide an opportunity for continuing dialog between the financial industry and the regulatory community about the Revised Framework. Financial industry representatives will look forward to further discussions with BCBS and other regulatory bodies not only about the development and use of the "qualifying securitisation" criteria but also concerning interpretive questions that arise under the Revised Framework, implementation of the Revised Framework in national laws and regulations, and possibly, a small number of other important improvements to the Revised Framework.

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Originally published December 23, 2014


1 BCBS, Revisions to the Basel Securitisation Framework – Basel III Document (11 Dec. 2014), available at Citations in this paper to numbered paragraphs of BCBS d303 refer to the standards text; citations to page numbers refer to the Introduction.

2 BCBS, Revisions to the Basel Securitisation Framework – Consultative Document (Dec. 2012), available at Our summary of the first consultative document is available at

3 BCBS, Revisions to the Basel Securitisation Framework – Consultative Document (Dec. 2013), available at

4 BCBS, Basel II: International Convergence of Capital Measurement and Capital Standards: A Revised Framework – Comprehensive Version (Jun. 2006), available at (BCBS 128); BCBS, Enhancements to the Basel II framework (Jul. 2009), available at (BCBS 157); BCBS, Revisions to the Basel II market risk framework – final version (Jul. 2009), available at (BCBS 158).

5 Mayer Brown, Revisions to Basel Securitisation Framework – Second Consultative Document (22 Jan. 2014), available at

6 BCBS d303 page 4.

7 Id. para. 22.

8 Id. para. 68 and Table 2; cf. BCBS 269 Annex I (rules text) para. 60.

9 Id. paras. 50-50(c).

10 Id. para. 52.

11 BCBS 128 paras. 362-373, 491, 495.

12 Id. para. 518.

13 Id. para. 620.

14 BCBS d303 para. 47.

15 BCBS 128 para. 607.

16 BCBS d303 para. 83.

17 Id. paras. 63 (IRBA), 83 (ERBA), 86 (SEC-SA).

18 Id. para. 73(a) ("The reference securitisation exposure (eg asset-backed security) must rank pari passu or be subordinate in all respects to the unrated securitisation exposure."). However, para. 72 states that the operational requirements for inferred ratings in para. 73 "are intended to ensure that the unrated position is senior in all respects to an externally rated securitisation exposure termed the 'reference securitisation exposure.'"We assume that this is an oversight and para. 72 should be read as conformed to be consistent with para. 73(a) and the provisions related to interest rate and currency swaps.

19 Id. para. 92.

20 BCBS 157 page 3.

21 BCBS d303 para. 96-97.

22 Id. para. 8.

23 Id. paras. 39-40 and footnote 16.

24 Id. para. 49 (IRBA). Similar wording appears in para. 79 (SEC-SA).

25 Id. footnote 20.

26 Id. paras. 53-55.

27 "Where the only difference between exposures to a transaction is related to maturity, A and D will be the same." Id. para. 48 (IRBA), para. 78 (SEC-SA).

28 Commercial Real Estate Finance Council (CREFC), Commercial Real Estate Finance Council Europe (CREFC Europe), Global Financial Markets Association (GFMA), Institute of International Finance (IIF), International Association of Credit Portfolio Managers (IACPM), International Swaps and Derivatives Association (ISDA), Securitisation Forum of Japan (SFJ) and Structured Finance Industry Group (SFIG), "Joint Associations' response to the second Consultative Document on Revisions to the Basel securitisation framework" (letter dated 24 Mar. 2014), available at

29 Available at

30 EBA Discussion Paper on simple standard and transparent securitisations (14 Oct. 2014), available at The consultation runs until 14 January 2015.

31 EC, Commission Delegated Regulation (EU) No .../.. of 10.10.2014 to supplement Regulation (EU) 575/2013 with regard to liquidity coverage requirement for Credit Institutions (10 Oct. 2014), available at, Article 13 (Level 2B securitisations).

32 EC, Commission Delegated Regulation (EU) No .../.. of ... supplementing Directive 2009/138/EC of the European Parliament and of the Council on the taking-up and pursuit of the business of Insurance and Reinsurance (Solvency II), available at, Article 177 (type 1 securitisation positions).

33 BCBS d303 page 1.

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