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Securitised instruments and significant risk transfer considerations

Question

Do reporting agents have to classify securitised instruments as “Traditional securitisation” or “Not securitised” when there is no significant risk transfer? Based on the description of the activities of an observed agent in the context of Article 4(1)(a)(i)-(iv) (Manual Part I – 4.3) and the definition of the “type of securitisation” (Manual Part II – 4.4.8), we have some doubts regarding how the reporting should take place. In particular, could you clarify the reporting in the case of securitised instruments, also considering whether there is a substantial transfer of risk?

Answer

Under AnaCredit, “Type of securitisation” describes whether the instrument is subject to a securitisation in accordance with the CRR.

Pursuant to Article 4(1)(61) of the CRR, “securitisation” means “a transaction or scheme, whereby the credit risk associated with an exposure or pool of exposures is tranched, having both of the following characteristics: (a) payments in the transaction or scheme are dependent upon the performance of the exposure or pool of exposures; (b) the subordination of tranches determines the distribution of losses during the ongoing life of the transaction or scheme”. In practice, securitisation is achieved via the economic transfer of ownership of the securitised instrument (traditional securitisation) or via the use of credit derivatives (synthetic securitisation).

Notably, “Type of securitisation” is reported in AnaCredit regardless of any significant risk transfer considerations, i.e. irrespective of whether or not there is a transfer of risk to third parties. That said, such considerations are reflected in the data attribute “balance sheet recognition” reported at the level of instrument. For example, the securities bought by the originating bank imply that it retains substantially all the credit risk of the loans, so the originating bank cannot derecognise them in accordance with the applicable accounting standard (i.e. “balance sheet recognition” of the loans cannot be “entirely derecognised”). For more information, refer to Q&A Instruments which are recognised in accordance with the applicable accounting standard which deals specifically with transferred instruments which continue to be recognised.

For example, consider instruments sold by a credit institution (Bank#A) to a Financial Vehicle Corporation (FVC#123) in a securitisation transaction, which presents all the characteristics of a tranched traditional securitisation, whereby the legal ownership has been transferred and securities issued (ISIN#789). Assume, however, that these securities have neither been sold to third parties nor used as collateral for financing to the NCB.

In this case, despite the fact that, in accordance with IFRS (used for prudential consolidated reporting (COREP)), there is no transfer of the risk to FVC#123 and Bank#A is considered to be the economic owner of the credit instruments, the transferred loans meet the definition of “traditional securitisation” where the creditor is FVC#123 (which is now the legal owner thereof) while Bank#A (which still recognises the loans on the balance sheet) is the servicer (and the originator) under AnaCredit. The creditor and the servicer remain the same even if later on the securities (ISIN#789) are sold to third parties. However, in the event of the transfer of substantially all the risks and rewards of the loans, Bank#A now derecognises the transferred loans, implying a change in the balance sheet recognition thereof.

Notably, it is the transfer of the legal ownership of the instrument which determines the creditor, i.e. the counterparty that has the right to receive payments from the debtor under the transferred loan (cf. Creditor in Section 6.4.1 in Part II of the AnaCredit Reporting Manual).

In general, in relation to instruments subject to tranched securitisation, whether tranches are sold or protection is purchased thereon, the data attribute “type of securitisation” does not depend on the value of the data attribute “balance sheet recognition” under AnaCredit.

Therefore, in both cases (i.e. before and after the securities (ISIN#789) are sold to third parties) the transferred loans are considered as securitised. However, depending on the accounting framework and significant risk transfer considerations, the instruments can have different values relating to the balance sheet recognition (e.g. IFRS risk and rewards compared with national GAAP criteria).

Related questions

See also Instruments which are recognised in accordance with the applicable accounting standard