European Banking Authority Launches Consultation on Draft Guidelines for Capital Requirements Regulation Contractual Payments
07/31/2019The European Banking Authority has launched a consultation on its proposed guidelines on the methodology used to determine the weighted average maturity of contractual payments due under securitization transaction tranches for the purposes of the Capital Requirements Regulation. The CRR establishes, amongst other things, the principles by which firms should calculate their credit risk, including in relation to securitization transactions. This includes specification of the risk factors to be taken into account when calculating credit risk. One such risk factor is the maturity of a relevant securitization tranche. Firms may adopt one of two methods to calculate tranche maturity: the final legal maturity of the tranche or the weighted average maturity of the contractual payments due under the tranche. It is with respect to the latter method that the EBA has issued its guidelines.
The draft guidelines cover: (i) the definition of contractual payments due under the tranche; (ii) data and information requirements; (iii) methodologies to determine contractual payments under securitized exposures and tranches; and (iv) implementation and use of the weighted average maturity model. Prior to issuing the guidelines, the EBA undertook a study of market practices on the calculation of maturities of securitization positions and how firms chose between the two methods for calculating maturities. It found that weighted average maturity was regarded by many participants as a key parameter for various purposes, including pricing and trading, funding and risk analysis. Firms calculated weighted average maturities differently depending on their role in a transaction (i.e. whether originator, sponsor or servicer as opposed to investor). The study also revealed that firms generally preferred using weighted average maturity to legal maturity where possible.
In setting out the guidelines, the EBA hopes to provide guiding principles on the calculation of weighted average maturity that will ensure consistency of own funds held by firms subject to the relevant CRR requirements and prevent arbitrage. Responses to the EBA's consultation should be provided by October 31, 2019.
View the EBA's consultation paper.
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