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In our opinion, dilution risk, commingling risk and set-off risk treatment is missing in the SRT assessment. In particular, we expect a clear calculation process for the treatment of each component which is expected to affect the collections diversion, especially in different waterfalls of the same capital structure.
Fair value prices of the underlying portfolio and of the related tranches are completely missing, too. This could affect all exposures originated purchasing portfolios from third parties either for securitization transactions and for trade receivables portfolios. We expect clear guidance on LGD parameter estimation, including the direct relation with purchase price value, which cannot be left aside.

This answer represents only the personal opinions of the author and does not reflect the official view of Deloitte Touche Tohmatsu Limited or any of its member firms
At a first glance, we agree on proposed triggers dealing with realized credit events, i.e. cumulative losses and cumulative non-matured defaults. Such performance indicators are those usually observed by investors in their monitoring activities even if the yield provided for the different tranches already accounts for different waterfall effects.
The problem is the reliance on rating agencies, as they do not account for the coherence between rating profile and fair value of the notes creating misleading expectations on timely cash flows of the securities.
Backtesting on rating models of securitization tranches - even demonstrated by transition matrices - are completely unacceptable for capital requirements purposes given the lack of consideration of the components related to intrinsic values of the portfolios (aligned with pricing assessments).
Although a safeguard could be viewed as a positive component, we think that fair value prices would be reviewed to account for trigger conditions, while the model risk would increase and collateral cash flows diversion would be more difficult to predict.
Granularity and credit risk buckets, in our opinion, are not reliable indicators to set the switch from pro-rata to sequential amortization.

This answer represents only the personal opinions of the author and does not reflect the official view of Deloitte Touche Tohmatsu Limited or any of its member firms
The use of time calls should be addressed in the comprehensive assessment both for traditional and synthetic transactions.
In general we think that all originators have to justify, from an economic efficiency point of view, the early termination under time calls in the periodic communications to regulators instead of defining a predetermined threshold.

This answer represents only the personal opinions of the author and does not reflect the official view of Deloitte Touche Tohmatsu Limited or any of its member firms
We agree on the proposal for excess spread in traditional securitizations, consistently with the treatment as credit enhancement of realized excess spread amount.

This answer represents only the personal opinions of the author and does not reflect the official view of Deloitte Touche Tohmatsu Limited or any of its member firms
A) We do not agree on a contractually fixed amount of excess spread. For the SRT first assessment if no excess spread is already funded, it should not be considered. For the on-going SRT assessment, the whole amount of available excess spread could be potentially used to absorb losses and therefore the commitment mechanism is not agreeable.
As a general principle, it is important to verify the timely coverage of losses within the credit enhancement components. If the losses are recorded in a principal or interest deficiency ledger and the excess spread could cover in different time windows the losses recorded then excess spread could be considered in the SRT assessment. In the other cases, only funded excess spread for the time window where the coverage is effective could be considered for the SRT.

This answer represents only the personal opinions of the author and does not reflect the official view of Deloitte Touche Tohmatsu Limited or any of its member firms

B) We agree on the “trap” excess spread allocation as the only mechanism, which can provide credit enhancement.

This answer represents only the personal opinions of the author and does not reflect the official view of Deloitte Touche Tohmatsu Limited or any of its member firms
We agree only for funded and realized excess spread to be subject to own funds requirements.

This answer represents only the personal opinions of the author and does not reflect the official view of Deloitte Touche Tohmatsu Limited or any of its member firms
A) We do not agree as this provision would result in a lack of coherence with other credit risk exposures as the revolving factoring ones (does the discount incorporate the excess spread?) and other credit assets (e.g. does the guarantee or repo exposure provide for a different treatment in case guarantee has an excess spread incorporated?).

This answer represents only the personal opinions of the author and does not reflect the official view of Deloitte Touche Tohmatsu Limited or any of its member firms

B) Including unrealized excess spread in Pillar I own funds requirements would generate variability of those funds over time. Indeed the actual size of excess spread depends on portfolio performance: defaults, prepayments, delinquencies should be predicted and banks should develop more detailed cash flow models than those currently used to price junior tranches.

This answer represents only the personal opinions of the author and does not reflect the official view of Deloitte Touche Tohmatsu Limited or any of its member firms
In our opinion the full deduction option is applicable to funded excess spread, too.

This answer represents only the personal opinions of the author and does not reflect the official view of Deloitte Touche Tohmatsu Limited or any of its member firms
The securitization has a set of regulatory provisions that mitigate some risk sources better than bonds and covered bonds: such mitigants regard commingling risk and segregation of the assets. Therefore, the allowance of early termination clauses could confuse the diversion of current cash flows and could damage investors yield profile encouraging claw back provisions for the retention of the assets/cash flows in favor of the originator.
In our opinion, the originator’s bankruptcy should not be included in the set of allowed early termination clauses.

This answer represents only the personal opinions of the author and does not reflect the official view of Deloitte Touche Tohmatsu Limited or any of its member firms
Including all proposed structural features in the self-assessment of risk transfer would result in more sophisticated models. Whereas for the first application all such features should be accounted for, on an ongoing basis attention should be given only to those features deemed to actually affect the SRT.

This answer represents only the personal opinions of the author and does not reflect the official view of Deloitte Touche Tohmatsu Limited or any of its member firms
No further evidence strictly related to “standard” securitizations. Anyway, we expect an EU-wide clear assessment for the correct classification and measurement of exposures under the following asset classes:
- Specialized lending and syndicated tranched loan facilities where the control exercised by the lender over the cash flows of the SPV / borrower is low or missing. Banks still report such exposures in the credit risk framework instead of the securitization framework if the control is not of the borrower / manager of the SPV even if the main control is of the other lenders of the same structure
- Subordination created by a single lender (single capital structure) where a specific guarantee given to first losses of the portfolio could create an enhancement equivalent to a junior tranche
This answer represents only the personal opinions of the author and does not reflect the official view of Deloitte Touche Tohmatsu Limited or any of its member firms
We agree in general with the proposed specification. The sell price of the underlying portfolio and the prices of tranches should be included in the minimum thickness assessment, too, as this could affect the real economic substance of the enhancement of each tranche. An EU-wide impact assessment should be conducted to determine the proper share of regulatory UL, which is expected to be covered by the first loss tranche weighted by the fair value of each tranche. A source of inconsistency is envisaged in the use of WAL, as in the new securitization framework it can be used only in prescribed circumstances (i.e. pre-defined scheduled principal of the tranches).

This answer represents only the personal opinions of the author and does not reflect the official view of Deloitte Touche Tohmatsu Limited or any of its member firms
We agree in general with the proposed specification. The sell price of the underlying portfolio and the prices of tranches should be included in the minimum thickness assessment, too, as this could affect the real economic substance of the enhancement of each tranche.
Even in this case, we think that a source of inconsistency is envisaged in the use of WAL, as in the new securitization framework it can be used only in prescribed circumstances.

This answer represents only the personal opinions of the author and does not reflect the official view of Deloitte Touche Tohmatsu Limited or any of its member firms
In case of mezzanine test a minimum tranche thickness requirement, specific for the mezzanine tranche should be addressed, also accounting for the price of the tranche/s.
Mezzanine tranches valuation is affected by pricing of equity tranches, which can be close to zero although they absorb the excess spread / margin yields of the underlying portfolio. In those cases, the thickness should be calibrated evaluating the specific prices of both portfolio and notes. We expect a coherence between fair value models, accounting models for de-recognition test under the IFRS 9 and the Significant Risk Transfer tests under CRR articles 243 and 244.
The rule defined in this discussion paper creates divergence between regulatory and accounting view: while the scenarios set for accounting de-recognition reflect fair value prices of the tranches, thickness regulatory provisions does not account for prices.
The divergence in those regulatory provisions creates expectations on credit enhancement related to the difference between GBV and NBV that are not justified.
An EU-wide impact assessment should be conducted to determine the proper share of regulatory UL which is expected to be covered by the mezzanine tranche/s.

This answer represents only the personal opinions of the author and does not reflect the official view of Deloitte Touche Tohmatsu Limited or any of its member firms
No impact is expected from the new securitization framework. The stressed expected loss as a benchmark to set the thickness of the first loss/mezzanine tranche is already addressed in current CRR and used in the structuring process of the banks compliant with the regulatory framework.

This answer represents only the personal opinions of the author and does not reflect the official view of Deloitte Touche Tohmatsu Limited or any of its member firms
In our opinion, the commensurate risk transfer test is not applicable when the difference between GBV and NBV is considered as credit enhancement. This circumstance would make easier to pass the test under fictitious conditions. Furthermore, the unexpected loss risk is completely misleading and not properly distributed across tranches in relation to real losses absorption.
Moreover, proposed calculation of Lifetime EL requires to account for the whole original outstanding, while it should be derived from the current outstanding of the portfolio accounting for the FV, as well.
A source of inconsistency is envisaged in the use of WAL, as in the new securitization framework it can be used only in prescribed circumstances.

This answer represents only the personal opinions of the author and does not reflect the official view of Deloitte Touche Tohmatsu Limited or any of its member firms
The significant risk transfer and the commensurate risk transfer should be conducted separately as in the proposed option 1. Although the Option 2 seems less effective than Option 1, an EU-wide impact assessment should be conducted to determine the proper threshold. Option 2 comprehensive test in case of the application of the SEC-ERBA could produce misleading results, as the measure of underlying portfolio capital requirement (Ka) could be reflected in different ways in rating agencies assessments.
The rating agencies process embeds different features of the transaction; the rating is typically assigned according to expected loss which is scaled up for predefined multipliers, thus including a measure of unexpected loss.

This answer represents only the personal opinions of the author and does not reflect the official view of Deloitte Touche Tohmatsu Limited or any of its member firms
No differentiation in needed across different asset classes. The SRT test should differ across STS and non-STS transactions, instead. More favorable risk weights resulting from new EU securitization framework for STS securitizations should be also reflected on the underlying exposures quantities, provided that the STS definition includes some requirements directly linked to the underlying portfolio. An inconsistency is found in the two different options:
• In the option 1, other things being equal, an STS securitization would make the SRT more difficult to achieve, reducing the capital post securitization on retained positions and ultimately increasing the Ratio 1
• In the option 2, other things being equal, an STS securitization would make the SRT easier to achieve, reducing the own funds requirements on retained positions
Furthermore, we stress the lack of coherence in the STS criteria, as they are not enough to differentiate between high quality securitizations from the others.
If we had performed the assessment for subprime US RMBS of the financial crisis we should have defined this structures as STS since they should have respected all the criteria.

This answer represents only the personal opinions of the author and does not reflect the official view of Deloitte Touche Tohmatsu Limited or any of its member firms
We have conducted an impact assessment on two selected traditional securitizations, currently subject to the first loss test for SRT in one case and to the mezzanine test in the other case.
The assessment has been conducted under the following assumptions:
• The securitizations are assumed to be non-STS
• The application of the SEC-SA approach has been assumed for the own funds requirement calculation
• Underlying impaired loans have been risk weighted with 150%
• Reported and observed delinquencies over the life of the transaction (ca. 1 year to date) have been assumed as EL
• The legal maturity of the transaction capped at 5 years has been used as WAL
• No excess spread has been assumed
According to the assessment results, the SRT test would be achieved both under Option 1 and under Option 2. Please note that Ka formula in the discussion paper example (p. 151) is not consistent with the definition under new securitization framework, since the KSA*(1-w) component is missing. The definition under new securitization framework has been used in the assessment.

This answer represents only the personal opinions of the author and does not reflect the official view of Deloitte Touche Tohmatsu Limited or any of its member firms
The treatment of the purchase price discount is crucial for the capital structure of NPL securitizations. The economic substance of the transaction would not be correctly represented with the purchase price discount fully considered as credit enhancement. Moreover this would not be conservative as this component can be seen as an unexpected proceed with very low probability of occurrence.
In our opinion, particular focus should be given to fair value prices both in securitization capital structure assessment and in internal rating models for the LGD estimation. Indeed, the purchase price influences capital structure definition of the transaction and LGD of the underlying portfolio affects the KIRB calculation. As a matter of that, current internal rating models should be able to capture differences between GBV and FV in the percentage of LGD, ELBE and LGDD considering the real potential expected loss and unexpected loss and not a potential recoverable amount of the GBV that has a remote probability to occur.
In particular, most of LGD values on performing and non-performing assets are estimated on the whole GBV. When underlying assets are sold to a SPV or a bank buys a third party originated portfolio, IFRS 9 and IFRS 13 are applied and fair value prices should become the value on which amortized cost valuation starts to be applied.
We want to stress the fact that considering GBV values accounting principles are not respected.
The portfolio fair value for the investor is quite always different from the NBV of that portfolio in the originator balance sheet; in the light of such evidence, the estimation of LGD should be adjusted to account for the difference between fair value and GBV. Therefore, the expected loss of the portfolio depends on the purchase price, creating a difference in the valuations of different financial institutions on the same portfolio, which is expected to change over time, too.
Thus, we completely disagree with statement in paragraph 300, as the RW of 1250% would be assigned only if Kirb and Ksa measures would be calculated including LGD, Elbe, LGDD on GBV without considering the scaling factor resulting from the consideration of the underlying portfolio purchase price.
In other words, why the LGD of all investors present in the capital structure should be equal even if the purchase price of the portfolio could be 21%, 120% or 1%?
Furthermore the junior tranche issued in the example reported in the discussion paper should be considered as an high mezzanine tranche given the fact the RW of the tranche is lower than 1250% and the credit enhancement is higher both than Kirb and by many senior exposures issued in the current outstanding securitizations in the market (that is a clear inconsistency).
We expect instead that:
1. The gross recovered amount is equal to the cash flows expected from the business plan of the investors / servicer of the SPV
2. The fair value (FV) is the discounted value of that cash flows (that represents the new GBV of the SPV as the accounting value while the old GBV is the nominal value)
3. LGDD of internal rating models and discount margin have to be coherent in respect of the FV and in respect of the results of art. 159 application before the securitization
4. PPD (and thus the real credit enhancement of the issued notes) is equal to the difference between NBV of the originator and FV
5. EL is equal to LGDD scaled by the PP
6. Even for Standardised exposures the Ksa is scaled by the PP
7. SEC-IRBA and SEC-SA are applied with AP, DP calculated considering only credit enhancement represented by point 4 above. As what concerns the Kirb, RWA of the underlying portfolio is calculated considering a potential stressed LGD related to the maximum stressed FV (MsFV as implied in the FV policy of each institution). As what concerns Ksa, RWA of the underlying portfolio is equal to the product of RWs as provided in CRR and the scaling factor derived from the ratio between FV and original GBV (of the originator).

We provide an example spreadsheet in attachment.

This answer represents only the personal opinions of the author and does not reflect the official view of Deloitte Touche Tohmatsu Limited or any of its member firms
The definition and quantification of variables involved in NPL valuation are not clear-cut. In our opinion, a clear guidance for the estimation of LGD should be published. Furthermore, public statistics regarding benchmark pools that account for mean recovery values and expected time of recovery, i.e. maximum (caps) and average values for recovery amounts and time to recovery.
In particular, we expect a clear definition of the following:
- Maximum time of recovery. Given internal direct and indirect costs, recovery values expected to come over 10-12 years have a value close to 0%. This is because we expect the time value and cost charge over single positions to write off the recovered nominal value
- Costs of recovery. LGD models account typically for direct recovery costs, but under a managerial and accounting point of view, this representation is misleading, as the recovery value should be adjusted for the marginal incidence of the indirect costs incurred to recover the single asset
- Indirect credit risk components as dilution, commingling, set-off are not included in this discussion paper. Tranches could absorb losses from such risks in different waterfalls and these cases should be addressed
- Fair value consideration in accounting and prudential values. The SPV funds the underlying loans with securitization tranches issuance, and, therefore, the purchase price becomes the reference value to apply amortized cost method. Thus, GBV is not the correct reference value for the KIRB calculation. If the GBV is used instead of the purchase price, accounting principle are not fulfilled
- Fair value components. When a FV is lower than NBV minus capital requirement of the underlying portfolio, it is possible to assume that FV includes all the EL of the exposure and a stressed UL. The calculation of further RWA on that portfolio would be very difficult to justify; assume the extreme case of an exposure bought close to zero value: for sure there would be no EL and UL to account for
- Discounting factors should not be related to cost of equity or ROA, as these values are very different across banks. A LGD model should reflect the discounted value as function of the intrinsic risk of the underlying assets, considering the particular market conditions as of the date of the analysis (expectations on market trends are implied in the fair value)

This answer represents only the personal opinions of the author and does not reflect the official view of Deloitte Touche Tohmatsu Limited or any of its member firms
Both in performing and non performing securitizations, purchase price of the underlying portfolio is the main driver to be considered in risk analysis as the difference between the BV and FV could be seen as the retention of expected loss and unexpected loss of the originator. While for the performing exposures, the difference could be seen between GBV and FV, for non-performing exposures this difference overestimate the purchase discount as it represents provisions already accounted for in the balance sheet of the originator. For re-performing exposures, forbearance restructured, the treatment should be equal to performing exposures but accounting for higher PD and LGD values related to the historical trend of the borrower

This answer represents only the personal opinions of the author and does not reflect the official view of Deloitte Touche Tohmatsu Limited or any of its member firms
We agree to consider GBV for the EAD of IRB exposures and the NBV for the EAD of Standard exposures while we see a lack of coherence in using GBV for LGD, ELBE and LGDD calculation (and KIRB calculation). This consideration refers to the misleading circumstance that if the FV price of the underlying portfolio is not considered, the economic substance of the transaction is not captured nor accounting principles and regulatory requirements are fulfilled.
For a given GBV, each of the counterparty involved have same KIRB because of same hypothetical LGD (F-IRB 45% and A-IRB whether convergent) and EAD. We expect instead that different prices of the underlying portfolio (and thus different tranching) affect LGD, ELBE and LGDD as the investors are exposed differently towards portfolio.
In other words, the distribution of losses should consider the amount that could hit the investor. Losses absorbed are different due to the subscription price (that has to be included not only in the EAD but also in the LGD) and not only because of the discount between GBV and FV.
Particular attention has to be paid to the coherence of what the FV of the underlying portfolio represents in terms of risk. There is no sense in deducting the PPD to the EL or similar assumption as one represents the complement to the economic value and the other the residual value of the underlying exposures.
Furthermore, all the underlying assets before being sold to the SPV have generated shortfall or excess capital in the balance sheet of the originator in compliance with CRR art. 159. The securitization framework is exempted from the application of that article.
Thus, we expect a clear provision to understand the regulatory opinion where excess capital has been generated even when the FV is below the NBV of the banks or viceversa. The provision has to rule the treatment of the assets still in the balance sheet of the originator regarding what happened to the assets sold to the SPV in respect of the calculation of art. 159
Coming back to the PPD, considering the whole purchase price discount is completely misleading as that is not an over-collateral or enhancement. The value of that discount is zero (no time value is considered anymore on that). Only the difference between NBV and FV is a credit enhancement with a real intrinsic value.
Furthermore, the sum of originator and investor expected loss and unexpected loss, respectively, pre and post securitisation, are different due to regulatory interpretation and not represent the economic substance of the transaction. In other words, the EL and UL before and after the securitisation for the KIRB estimation should be comparable or at least related.

This answer represents only the personal opinions of the author and does not reflect the official view of Deloitte Touche Tohmatsu Limited or any of its member firms
The current quantitative CRR tests provided in the articles 243 and 244 are consistent with the NPL securitisation framework, even if there is a lack of clarity for the junior (and mezzanine) tranche thickness related to the stress of EL. The main dilemma is the treatment of the purchase price discount where the assets are out of the balance sheet of the originator. In our opinion, the purchase price discount should be the difference between NBV and FV while the difference between GBV and NBV should be treated as unexpected gain because the FV of that component is close to zero. Furthermore, some features need to be addressed, as reported in answer 28 above

This answer represents only the personal opinions of the author and does not reflect the official view of Deloitte Touche Tohmatsu Limited or any of its member firms
As the proposed commensurateness test is theoretically consistent with the NPL framework it should consider the role of the purchase price, especially with reference to the determination of the lifetime EL+UL. In case of SEC-SA, the determination of EL should consider a scaling factor, proportional to the NBV of the pool, in order to account for the economic substance of the transaction (as the tranching is usually based on net values). In case of SEC-IRBA, the scaling factor applied to EL and UL of the pool would be embedded in the different determination of the LGD both for performing and non-performing exposures. The latter should account for the current amount of net recoveries that are implied in the FV, and consequently should consider the whole amount of provisions made over the pool. Furthermore, provided that FV estimation accounts for at least the EL, the commensurateness ratio 2 (both in case of SEC-SA and SEC-IRBA approach) should consider only the UL portion of the total loss

This answer represents only the personal opinions of the author and does not reflect the official view of Deloitte Touche Tohmatsu Limited or any of its member firms
Option 2 seems to be consistent with NPL transactions, except for the determination of the EL that should be adjusted for a scaling factor. The latter should be estimated accounting for the provisions made on the pool and included in the estimation of the FV, and a measure of UL that is proportional to the same FV

This answer represents only the personal opinions of the author and does not reflect the official view of Deloitte Touche Tohmatsu Limited or any of its member firms
Orazio Lascala
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