19.The Standards requires that banks apply a 100% CCF to any securitisation-related off-balance-sheet exposures that are not credit risk mitigants. One example of such an off-balance-sheet exposure that may arise with securitisations is a commitment for servicer cash advances, under which a servicer enters into a contract to advance cash to ensure an uninterrupted flow of payments to investors. The BCBS securitisation framework provides national discretion to permit the undrawn portion of servicer cash advances that are unconditionally cancellable without prior notice to receive the CCF for unconditionally cancellable. The Central Bank has chosen not to adopt this discretionary treatment, and instead requires a 100% CCF for all off-balance-sheet exposures, including undrawn servicer cash advances.

20.Banks may adjust risk weights for overlapping exposures. An exposure A overlaps another exposure B if in all circumstances the bank can avoid any loss on exposure B by fulfilling its obligations with respect to exposure A. For example, if a bank holds notes as an investor but provides full credit support to those notes, its full credit support obligation precludes any loss from its exposure to the notes. If a bank can verify that fulfilling its obligations with respect to exposure A will preclude a loss from its exposure to B under any circumstance, the bank does not need to calculate risk-weighted assets for its exposure B.

21.To demonstrate an overlap, a bank may, for the purposes of calculating capital requirements, split or expand its exposures. That is, splitting exposures into portions that overlap with another exposure held by the bank and other portions that do not overlap, or expanding exposures by assuming for capital purposes that obligations with respect to one of the overlapping exposures are larger than those established contractually. The latter could be done, for instance, by expanding either the assumed extent of the obligation, or the trigger events to exercise the facility. A bank may also recognize overlap between exposures in the trading book and securitisation exposures in the banking book, provided that the bank is able to calculate and compare the capital charges for the relevant exposures.

22.To be eligible for use in the securitisation framework, the external credit assessment must take into account and reflect the entire amount of credit risk exposure the bank has with regard to all payments owed to it. For example, if a bank is owed both principal and interest, the assessment must fully take into account and reflect the credit risk associated with timely repayment of both principal and interest.

23.A bank is not permitted to use any external credit assessment for risk-weighting purposes where the assessment is at least partly based on unfunded support provided by the bank itself. For example, if a bank buys ABCP where it provides an unfunded securitisation exposure extended to the ABCP program (e.g., liquidity facility or credit enhancement), and that exposure plays a role in determining the credit assessment on the ABCP, the bank must treat the ABCP as if it were not rated. The bank also must hold capital against the liquidity facility and/or credit enhancement as a securitisation exposure.

24.External credit assessments used for the SEC-ERBA must be from an eligible external credit assessment institution (ECAI) as recognized by the Central Bank in accordance with the Central Bank standards on rating agency recognition. However, the securitisation Standards additionally requires that the credit assessment, procedures, methodologies, assumptions and the key elements underlying the assessments must be publicly available, on a non-selective basis and free of charge. Consequently, ratings that are made available only to the parties to a transaction do not satisfy this requirement. Where the eligible credit assessment is not publicly available free of charge, the ECAI should provide an adequate justification, within its own publicly available code of conduct, in accordance with the “comply or explain” nature of the International Organization of Securities Commissions’ Code of Conduct Fundamentals for Credit Rating Agencies.

25.Under the Standards, a bank may infer a rating for an unrated position from an externally rated “reference exposure” for purposes of the SEC-ERBA provided that the reference securitisation exposure ranks pari passu or is subordinate in all respects to the unrated securitisation exposure. Credit enhancements, if any, must be taken into account when assessing the relative subordination of the unrated exposure and the reference securitisation exposure. For example, if the reference securitisation exposure benefits from any third-party guarantees or other credit enhancements that are not available to the unrated exposure, then the latter may not be assigned an inferred rating based on the reference securitisation exposure.

26.The supervisory formula used for the calculations within the SEC-SA has been calibrated by the BCBS to generate required capital under an assumed minimum 8% risk-based capital ratio. As a result, the appropriate conversion to risk-weighted assets for the SEC-SA generally requires multiplication of the computed capital ratio by a factor of 12.5 (the reciprocal of 8%) to produce the risk weight used within broader calculations of risk-based capital adequacy. This multiplication by 12.5 is reflected in the requirements as articulated in the Central Bank’s Securitisation Standards.

27.If the underlying pool of exposures receives a risk weight of 1250%, then paragraph 5 of the Introduction of the Standards for Capital Adequacy of banks in the UAE is applicable.

28.When applying the supervisory formula for the SEC-SA to structures involving an SPE, all of the SPE’s exposures related to the securitisation are to be treated as exposures in the pool. In particular, in the case of swaps other than credit derivatives, the exposure should include the positive current market value times the risk weight of the swap provider. However, under the Standards, a bank can exclude the exposures of the SPE from the pool for capital calculation purposes if the bank can demonstrate that the risk does not affect its particular securitisation exposure or that the risk is immaterial, for example because it has been mitigated. Certain market practices may eliminate or at least significantly reduce the potential risk from a default of a swap provider. Examples of such features could be:

1. •cash collateralization of the market value in combination with an agreement of prompt additional payments in case of an increase of the market value of the swap; or
2. •minimum credit quality of the swap provider with the obligation to post collateral or present an alternative swap provider without any costs for the SPE in the event of a credit deterioration on the part of the original swap provider.

If the bank is able to demonstrate that the risk is mitigated in this way, and that the exposures do not contribute materially to the risks faced by the bank as a holder of the securitisation exposure, the bank may exclude these exposures from the K_SA calculation.