On 13 Dec 2024, the HKMA published supplementary guidance clarifying the application of the revised credit risk framework to securitization transactions under the Banking (Capital)(Amendment) Rules 2023. The guidance defines securitization transactions, establishes capital treatment for non-eligible transactions, and details eligibility requirements including independent self-assessments and two critical risk retention ratios. It also prohibits implicit support beyond contractual obligations and specifies classification rules for underlying exposure pools.
This article was generated using SAMS, an AI technology by Timothy Loh LLP.
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Definition of Securitization Transaction
On 13 Dec 2024, the HKMA issued supplementary guidance clarifying the definition of 'securitization transaction' under the Banking (Capital)(Amendment) Rules 2023. A transaction qualifies as a securitization transaction if it features at least two tranches where the junior tranche absorbs credit losses first to protect senior tranches. Transactions with tranches differing only in coupon rates, yields, or maturities—where losses are allocated pro-rata—do not qualify.
Capital Treatment Framework
For non-securitization transactions, exposures held by authorized institutions (AIs) in the banking book must be risk-weighted using the BSC, STC, or IRB approach. If assets are securitized via credit risk mitigation (e.g., credit derivatives), AIs may apply the CRM under applicable approaches. If assets are sold to a special purpose entity (SPE) and derecognized per accounting standards, AIs may exclude them from credit risk RWA calculations.
Eligibility Assessment Requirements
To obtain capital relief for securitization transactions, AIs must conduct a prudent assessment against §229(1) criteria, confirm eligibility, and notify HKMA per §230(3)-(4). The HKMA will issue an acknowledgement letter; relief is presumed if no objection is received within the specified timeframe. AIs may elect not to apply relief even if eligible. Self-assessments must be independent, well-documented, and include two key ratios: (a) AI's non-senior securitization holdings relative to total non-senior issues, and (b) AI's non-senior exposures relative to total non-senior exposures.
Implicit Support Provisions
Implicit support—beyond predetermined contractual obligations—is prohibited and may invalidate eligibility. Examples include repurchasing assets above fair value, selling exposures at discounts into the pool, increasing first-loss holdings during credit deterioration, or waiving contractual rights. Legitimate reasons (e.g., regulatory risk retention compliance) are exempt. Implicit support must be included in RWA calculations if within contractual limits.
Classification and Credit Enhancement
HKMA may require classification of underlying exposure pools as SA pools for transactions with complex loss allocations, high correlation, or sector concentration. Credit enhancement (e.g., subordination, guarantees) must be fully risk-weighted if its amount is indeterminable. For SEC-ERBA usage, credit ratings must be issued by HKMA-recognized external credit assessment institutions under the Sep 2013 policy paper, with specific references adjusted to align with SEC-ERBA.
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