12 CFR § 217.145 - Recognition of credit risk mitigants for securitization exposures.

# 217.145 Recognition of credit risk mitigants for securitization exposures.

(a) *General.* An originating Board-regulated institution that has obtained a credit risk mitigant to hedge its securitization exposure to a synthetic or traditional securitization that satisfies the operational criteria in § 217.141 may recognize the credit risk mitigant, but only as provided in this section. An investing Board-regulated institution that has obtained a credit risk mitigant to hedge a securitization exposure may recognize the credit risk mitigant, but only as provided in this section.

(b) *Collateral*—(1) *Rules of recognition.* A Board-regulated institution may recognize financial collateral in determining the Board-regulated institution's risk-weighted asset amount for a securitization exposure (other than a repo-style transaction, an eligible margin loan, or an OTC derivative contract for which the Board-regulated institution has reflected collateral in its determination of exposure amount under § 217.132) as follows. The Board-regulated institution's risk-weighted asset amount for the collateralized securitization exposure is equal to the risk-weighted asset amount for the securitization exposure as calculated under the SSFA in § 217.144 or under the SFA in § 217.143 multiplied by the ratio of adjusted exposure amount (SE*) to original exposure amount (SE),

Where:

(i) SE* = max {0, [SE−C × (1−H<sub>s</sub>−H<sub>fx</sub>)]};

(ii) SE = the amount of the securitization exposure calculated under § 217.142(e);

(iii) C = the current fair value of the collateral;

(iv) H<sub>s</sub> = the haircut appropriate to the collateral type; and

(v) H<sub>fx</sub> = the haircut appropriate for any currency mismatch between the collateral and the exposure.

(3) *Standard supervisory haircuts.* Unless a Board-regulated institution qualifies for use of and uses own-estimates haircuts in paragraph (b)(4) of this section:

(i) A Board-regulated institution must use the collateral type haircuts (H<sub>s</sub>) in Table 1 to § 217.132 of this subpart;

(ii) A Board-regulated institution must use a currency mismatch haircut (H<sub>fx</sub>) of 8 percent if the exposure and the collateral are denominated in different currencies;

(iii) A Board-regulated institution must multiply the supervisory haircuts obtained in paragraphs (b)(3)(i) and (ii) of this section by the square root of 6.5 (which equals 2.549510); and

(iv) A Board-regulated institution must adjust the supervisory haircuts upward on the basis of a holding period longer than 65 business days where and as appropriate to take into account the illiquidity of the collateral.

(4) *Own estimates for haircuts.* With the prior written approval of the Board, a Board-regulated institution may calculate haircuts using its own internal estimates of market price volatility and foreign exchange volatility, subject to § 217.132(b)(2)(iii). The minimum holding period (T<sub>M</sub>) for securitization exposures is 65 business days.

(c) *Guarantees and credit derivatives*—(1) *Limitations on recognition.* A Board-regulated institution may only recognize an eligible guarantee or eligible credit derivative provided by an eligible guarantor in determining the Board-regulated institution's risk-weighted asset amount for a securitization exposure.

(2) *ECL for securitization exposures.* When a Board-regulated institution recognizes an eligible guarantee or eligible credit derivative provided by an eligible guarantor in determining the Board-regulated institution's risk-weighted asset amount for a securitization exposure, the Board-regulated institution must also:

(i) Calculate ECL for the protected portion of the exposure using the same risk parameters that it uses for calculating the risk-weighted asset amount of the exposure as described in paragraph (c)(3) of this section; and

(ii) Add the exposure's ECL to the Board-regulated institution's total ECL.

(3) *Rules of recognition.* A Board-regulated institution may recognize an eligible guarantee or eligible credit derivative provided by an eligible guarantor in determining the Board-regulated institution's risk-weighted asset amount for the securitization exposure as follows:

(i) *Full coverage.* If the protection amount of the eligible guarantee or eligible credit derivative equals or exceeds the amount of the securitization exposure, the Board-regulated institution may set the risk-weighted asset amount for the securitization exposure equal to the risk-weighted asset amount for a direct exposure to the eligible guarantor (as determined in the wholesale risk weight function described in § 217.131), using the Board-regulated institution's PD for the guarantor, the Board-regulated institution's LGD for the guarantee or credit derivative, and an EAD equal to the amount of the securitization exposure (as determined in § 217.142(e)).

(ii) *Partial coverage.* If the protection amount of the eligible guarantee or eligible credit derivative is less than the amount of the securitization exposure, the Board-regulated institution may set the risk-weighted asset amount for the securitization exposure equal to the sum of:

(A) *Covered portion.* The risk-weighted asset amount for a direct exposure to the eligible guarantor (as determined in the wholesale risk weight function described in § 217.131), using the Board-regulated institution's PD for the guarantor, the Board-regulated institution's LGD for the guarantee or credit derivative, and an EAD equal to the protection amount of the credit risk mitigant; and

(B) *Uncovered portion.* (*1*) 1.0 minus the ratio of the protection amount of the eligible guarantee or eligible credit derivative to the amount of the securitization exposure); multiplied by

(*2*) The risk-weighted asset amount for the securitization exposure without the credit risk mitigant (as determined in §§ 217.142 through 146).

(4) *Mismatches.* The Board-regulated institution must make applicable adjustments to the protection amount as required in § 217.134(d), (e), and (f) for any hedged securitization exposure and any more senior securitization exposure that benefits from the hedge. In the context of a synthetic securitization, when an eligible guarantee or eligible credit derivative covers multiple hedged exposures that have different residual maturities, the Board-regulated institution must use the longest residual maturity of any of the hedged exposures as the residual maturity of all the hedged exposures.