As per Regulation 2017/2401 Article 249 (6), an institution buying full credit protection or partial credit protection shall calculate risk-weighted exposure amounts in accordance with Chapter 4 of the CRR. Similarly, for tranched protection ruled under Article 249 (7), the protected portion should also be treated in accordance with CRR Chapter 4.

In accordance with CRR Article 108 ruling for the use of credit risk mitigation techniques under Standardised Approach and the IRB Approach, the Chapter 4 is applicable for exposures treated under Standardised Approach or under Foundation IRB only.

The CRR Article 264 (CRM for securitization positions subject to the IRB Approach) before being amended by Regulation 2017/2401 was further specifying that for the purpose of applying Chapter 4 under securitization framework, the risk weight g of the protection provider within the substitution approach established by CRR Chapter 4 Article 235 shall be determined in accordance with the IRB approach for which the institution is permitted to calculate risk-weighted exposure amounts for comparable direct exposures to the protection provider in accordance with Chapter 3.

This helps clarifying the situation where the securitization position is treated under SEC-IRBA and is covered by a protection provider that would be treated under IRB approach for its direct exposures.  Similarly, when direct exposures to the credit protection provider are treated under the Standardised approach in accordance with CRR Article 148 and 150, institution shall apply a standard risk-weight to the protected portion of the securitization position regardless of the approach used on the securitization position.

However, the institution holding the position and buying the credit protection covering it may be IRB homologated and allowed to use own LGD estimate for direct exposures to the protection provider while not meeting the conditions for the use of the SEC-IRBA as set out by Article 258 for the securitized exposures (e.g. for non-originated transactions). Consequently, the institution shall use the SEC-SA or the SEC-ERBA on the securitization positions.

When applying Chapter 4 on a securitization position in such a situation, one could thus question what approach is due on the protected portion of the position since it is not under IRB approach but covered by a credit protection provider which belongs to an exposure class that the institution holding the position treats under IRB approach