68.A bank may recognize the following forms of purchased credit protection in accordance with the CRM framework when calculating capital requirements:

• •collateral eligible for CRM under the Central Bank’s Standard for Credit Risk, including collateral pledged by SPEs;
• •credit protection provided by eligible guarantors, but not including SPEs; and
• •Guarantees or credit derivatives that fulfil the requirements for CRM under the Central Bank’s Standard for Credit Risk.

69.When a bank provides full (or pro rata) credit protection to a securitisation exposure, the bank must calculate its capital requirements as if it directly holds the portion of the securitisation exposure on which it has provided credit protection, using the requirements of this Standard.

Tranched protection

70.With tranched credit protection, the original securitisation tranche is decomposed into protected and unprotected sub-tranches. A provider of tranched credit protection must calculate required capital as if directly exposed to the particular sub-tranche of the securitisation exposure on which it is providing protection, according to the capital requirements for securitisations under this Standard.

71.A buyer of tranched credit protection may recognize tranched protection on the guaranteed or protected portion according to the applicable CRM framework, provided that the conditions for recognition of credit risk mitigation are met.

72.For a bank using the SEC-SA for the original securitisation exposure, the parameters A and D should be calculated separately for each unprotected sub-tranche as if they were directly issued as separate tranches at the inception of the transaction.

73.For a bank using the SEC-ERBA for the original securitisation exposure, the relevant risk weights for the different sub-tranches are as follows:

• •For the sub-tranche of highest priority, the bank should use the risk weight of the original securitisation exposure.
• •For a sub-tranche of lower priority, if the bank can infer a rating from one of the subordinated tranches of the original transaction, the risk weight of the sub-tranche can be determined by applying the inferred rating for the SEC-ERBA, with the tranche thickness computed for the sub-tranche of lower priority only.
• •For a sub-tranche of lower priority where the bank cannot infer a rating, the risk weight for the sub-tranche of lower priority is the larger of (a) the SEC-SA risk weight with the parameters A and D calculated separately for each of the sub-tranches as if they were directly issued as separate tranches at the inception of the transaction, or (b) the SEC-ERBA risk weight of the original securitisation exposure prior to recognition of protection.

74.Under all approaches, a lower-priority sub-tranche must be treated as a non-senior securitisation exposure even if the original securitisation exposure prior to protection qualified as senior.

Maturity mismatches

75.A maturity mismatch exists when the residual maturity of a hedge is less than that of the underlying exposure.

76.In the case of a maturity mismatch on protection provided for a securitisation exposure, the banks should follow the approach to maturity mismatches specified in the Central Bank’s Standard for Credit Risk. When the exposures being hedged have different maturities, the longest maturity must be used.

77.Banks that synthetically securitize exposures held on their balance sheet by purchasing tranched credit protection must apply the maturity mismatch treatment specified in the Central Bank’s Standard for Credit Risk. When the exposures being hedged have different maturities, banks must use the longest maturity. However, for securitisation exposures that are assigned a risk weight of 1250%, maturity mismatches are not taken into account.