Circular No. 2022-01 on the Prudential Regime for System Securitization

Central Bank of the Republic of San Marino Circular No. 2022-01 on the Prudential Regime for System Securitization (Update II)

INDEX

1. DEFINITIONS...........................................................................................................................................................3
2. PURPOSES AND LEGAL BASIS............................................................................................................................4
3. PRUDENTIAL REGIME FOR ASSET BACKED SECURITIES ..................................................................................4 3.1 Risk Weight Factor for ABS-Senior................................................................................................................................................... 4 3.2 Risk Weight Factor for ABS-Mezzanine ........................................................................................................................................... 5 3.3 Risk Weight Factor for ABS-Junior.................................................................................................................................................... 5
4. PRUDENTIAL REGIME FOR ESCROW ACCOUNT..................................................................................................8
5. ENTRY INTO FORCE............................................................................................................................................8

Central Bank of the Republic of San Marino Circular No. 2022-01 on the Prudential Regime for System Securitization (Update II) 3

1. DEFINITIONS
2. For the purposes of this Circular, the expressions used shall be understood with the following meanings: a) “Asset Backed Securities” or “ABS”: financial instruments as defined in Article 2, paragraph 1, letter a) of Law 30 August 2021 No. 157 and subsequent amendments, issued by the System Vehicle; b) “Asset Backed Securities Senior” or “ABS Senior”: ABS Senior as defined in Article 16 of Law 30 August 2021 No. 157 and subsequent amendments; c) “Asset Backed Securities Mezzanine” or “ABS Mezzanine”: ABS Mezzanine as defined in Article 16 of Law 30 August 2021 No. 157 and subsequent amendments; d) “Asset Backed Securities Junior” or “ABS Junior”: ABS Junior as defined in Article 16 of Law 30 August 2021 No. 157 and subsequent amendments; e) “Assets Subject to System Securitization” or “ACDS”: assets subject to the system securitization operation as defined in Article 14, paragraph 1 of Law 30 August 2021 No. 157 and subsequent amendments; f) “Central Bank”: Central Bank of the Republic of San Marino; g) “System Securitization”: securitization operation as defined in Chapter III of Law 30 August 2021 No. 157 and subsequent amendments; h) “Securitization Law”: Law 30 August 2021 No. 157 and subsequent amendments; i) “LISF”: Law 17 November 2005 No. 165 and subsequent amendments; j) “Securitization Operation”: securitization operation as defined in Article 2, paragraph 1, letter q) of Law 30 August 2021 No. 157 and subsequent amendments; k) “Originator”: entity as defined in Article 2, paragraph 1, letter r) of Law 30 August 2021 No. 157 and subsequent amendments, which transfers the assets subject to system securitization; l) “Escrow Account”: escrow account as defined in Article 19 of Law 30 August 2021 No. 157 and subsequent amendments; m) “Insurance Guarantee”: guarantee on ABS Senior as defined in Article 21 of Law 30 August 2021 No. 157 and subsequent amendments, issued by a primary insurance company; n) “State Guarantee”: guarantee on ABS Senior as defined in Article 21 of Law 30 August 2021 No. 157 and subsequent amendments, issued by the Honorable Chamber of the Republic of San Marino; o) “Operation Program”: operation program as defined in Article 3 of Law 30 August 2021 No. 157 and subsequent amendments, relating to system securitization; p) “BCSM Regulation No. 2007-07”: Regulation No. 2007-07 on savings collection and banking activity; q) “System Vehicle” or “VDS”: system vehicle as defined in Article 11 of Law 30 August 2021 No. 157 and subsequent amendments.
3. Unless otherwise specified, for the purposes of this Circular, the definitions contained in Law 17 November 2005 No. 165, Law 30 August 2021 No. 157, and BCSM Regulation No. 2007-07 shall apply.
4. In the subsequent articles of this Circular, words that refer to the definitions in paragraph 1 are printed in CAPITAL LETTERS.

Central Bank of the Republic of San Marino Circular No. 2022-01 on the Prudential Regime for System Securitization (Update II) 4 2. PURPOSES AND LEGAL BASIS

1. This Circular, issued in implementation of Article 18, paragraph 2 of the SECURITIZATION LAW and pursuant to Article 45 of the LISF, establishes the prudential regime applicable to SYSTEM SECURITIZATION - with particular regard to the prudential treatment of ABS held by ORIGINATOR banks in their proprietary securities portfolio (on-balance sheet assets) and the ESCROW ACCOUNT (off-balance sheet operation) – taking into account the existing regulatory framework on credit risk, capital adequacy, and capital ratio as set out in Title III of Part VII of BCSM REGULATION NO. 2007-07.
2. This Circular, in conformity with Article 38, paragraph 5 of the LISF and the implementing BCSM Regulation No. 2006-02, was subject to public consultation.
3. PRUDENTIAL REGIME FOR ASSET BACKED SECURITIES
4. For the purposes of calculating the capital ratio as defined in Article VII.III.2 of BCSM REGULATION NO. 2007-07, ORIGINATOR banks include ABS held in their proprietary securities portfolio among risk assets; such ABS, as they derive from SYSTEM SECURITIZATION, are nevertheless excluded from the regulations on risk concentration.
5. ABS are included in the calculation of the capital ratio by weighting the book value of each ABS tranche held over time by the ORIGINATOR banks with the risk weight factors provided for each tranche.
6. The risk weight factors to be applied to each ABS tranche are determined based on the calculation methodology set out in the following sub-paragraphs, which takes into account the credit risk inherent in the ASSETS SUBJECT TO SYSTEM SECURITIZATION and the different levels of protection in the right to repayment provided for each ABS tranche. 3.1 Risk Weight Factor for ABS-Senior
7. The risk weight factor to be applied to ABS-SENIOR shall be 75 percent: 𝑅𝑊𝐹_𝑆𝑒𝑛𝑖𝑜𝑟 = 75%
8. The risk weight factor referred to in paragraph 1 is reduced:  to 20% if ABS-SENIOR are supported by an INSURANCE GUARANTEE;  to 0% if ABS-SENIOR are supported by a STATE GUARANTEE.

Central Bank of the Republic of San Marino Circular No. 2022-01 on the Prudential Regime for System Securitization (Update II) 5 3. The risk weight factor is determined pursuant to the preceding paragraphs 1 and 2 even if ABS-SENIOR are not held by an ORIGINATOR bank. 3.2 Risk Weight Factor for ABS-Mezzanine

1. The risk weight factor to be applied to ABS-MEZZANINE is specific to each ORIGINATOR bank “i” and is equal to the weighted average of the risk weight factors of its portfolio of ASSETS SUBJECT TO SYSTEM SECURITIZATION transferred to the SYSTEM VEHICLE (average risk weight factor): 𝑅𝑊𝐹_𝑀𝑒𝑧𝑧𝑎𝑛𝑖𝑛𝑒𝑖 = 𝑅𝑊𝐹 ̅̅̅̅̅̅̅ 𝑖
2. The average risk weight factor of the portfolio of ASSETS SUBJECT TO SYSTEM SECURITIZATION specific to each ORIGINATOR bank “i” (𝑅𝑊𝐹 ̅̅̅̅̅̅̅ 𝑖) is determined based on the following formula: 𝑅𝑊𝐹 ̅̅̅̅̅̅̅ 𝑖 = 𝑇𝑅𝑊𝐴𝑖 𝑇𝑁𝑉𝐴𝑖 where:  𝑅𝑊𝐹 ̅̅̅̅̅̅̅ 𝑖 = average risk weight factor of the portfolio of ASSETS SUBJECT TO SYSTEM SECURITIZATION specific to ORIGINATOR bank “i”;  𝑇𝑅𝑊𝐴𝑖 = total of ASSETS SUBJECT TO SYSTEM SECURITIZATION transferred to the SYSTEM VEHICLE by ORIGINATOR bank “i” weighted for their credit risk. This total is determined by applying to the net transfer value from ORIGINATOR bank “i” to the SYSTEM VEHICLE of each of its ASSETS SUBJECT TO SYSTEM SECURITIZATION, excluding assets referred to in Article 14, paragraph 1, letter c) of the SECURITIZATION LAW, the provisions on risk-weighted credit risk set out in Articles VII.III.3 to VII.III.7 of BCSM REGULATION NO. 2007-07;  𝑇𝑁𝑉𝐴𝑖 = total net transfer value from ORIGINATOR bank “i” to the SYSTEM VEHICLE of its portfolio of ASSETS SUBJECT TO SYSTEM SECURITIZATION, excluding assets referred to in Article 14, paragraph 1, letter c) of the SECURITIZATION LAW.
3. The risk weight factor to be applied to ABS-MEZZANINE when not held by an ORIGINATOR bank shall be 135 percent: 𝑅𝑊𝐹_𝑀𝑒𝑧𝑧𝑎𝑛𝑖𝑛𝑒 = 135% 3.3 Risk Weight Factor for ABS-Junior
4. The risk weight factor to be applied to ABS-JUNIOR is specific to each ORIGINATOR bank “i” and for the first year following the issuance of ABS is equal to 3 times the average risk weight factor of its portfolio of ASSETS SUBJECT TO SYSTEM SECURITIZATION transferred to the SYSTEM VEHICLE:

Central Bank of the Republic of San Marino Circular No. 2022-01 on the Prudential Regime for System Securitization (Update II) 6 𝑅𝑊𝐹_𝐽𝑢𝑛𝑖𝑜𝑟𝑖,𝑡=0 = 3 ∗ 𝑅𝑊𝐹 ̅̅̅̅̅̅̅ 𝑖 2. The risk weight factor referred to in paragraph 1, from the beginning of the second year following the issuance of ABS and until the maturity of the ABS-JUNIOR, is subject to annual adjustment for each ORIGINATOR bank “i”, based on:  an additional annual constant risk weight factor, functional to determine an incremental capital absorption over time for ABS-JUNIOR, until reaching a weighting equivalent to the full deduction from supervisory capital at the maturity date provided for them;  a corrective risk weight factor, functional to correct the capital absorption of ABS-JUNIOR upwards or downwards, based on the deviation recorded between the cumulative net cash flows actually realized year by year from the total of ASSETS SUBJECT TO SYSTEM SECURITIZATION and the cumulative net cash flows expected with reference to the same period in the OPERATION PROGRAM. 3. The risk weight factor to be applied to ABS-JUNIOR from the second year following the issuance of ABS and until the maturity of the ABS-JUNIOR is specific to each ORIGINATOR bank “i” and is determined based on the following formula, subject to the application of a minimum risk weight factor equal to the initial one referred to in paragraph 1: 𝑅𝑊𝐹_𝐽𝑢𝑛𝑖𝑜𝑟𝑖,𝑡 = (𝑅𝑊𝐹_𝐽𝑢𝑛𝑖𝑜𝑟𝑖,𝑡=0 + (𝑡 − 1) ∗ 𝜇𝑖 + 𝛿𝑖,𝑡 ) where:  𝑅𝑊𝐹_𝐽𝑢𝑛𝑖𝑜𝑟𝑖,𝑡 = overall risk weight factor to be applied by ORIGINATOR bank “i” to ABS-JUNIOR with reference to year “t”;  𝑅𝑊𝐹_𝐽𝑢𝑛𝑖𝑜𝑟𝑖,𝑡=0 = 3 ∗ 𝑅𝑊𝐹 ̅̅̅̅̅̅̅ 𝑖 ;  𝜇𝑖 = constant annual additional risk weight factor relative to ORIGINATOR bank “i”;  𝛿𝑖,𝑡 = corrective risk weight factor to be applied by ORIGINATOR bank “i” to ABS-JUNIOR with reference to year “t”; and subject to the condition that: 𝑅𝑊𝐹_𝐽𝑢𝑛𝑖𝑜𝑟𝑖,𝑡 ≥ 𝑅𝑊𝐹_𝐽𝑢𝑛𝑖𝑜𝑟𝑖,𝑡=0. 4. The constant additional risk weight factor is specific to each ORIGINATOR bank “i” (𝜇𝑖) and is determined based on the following formula: 𝜇𝑖 = ( 1 𝑀𝐶𝑅 − 𝑅𝑊𝐹_𝐽𝑢𝑛𝑖𝑜𝑟𝑖,𝑡=0) 𝑇 − 1 where:

Central Bank of the Republic of San Marino Circular No. 2022-01 on the Prudential Regime for System Securitization (Update II) 7  𝜇𝑖 = constant annual additional risk weight factor specific to ORIGINATOR bank “i”;  𝑀𝐶𝑅 = minimum capital ratio equal to 8%;  𝑅𝑊𝐹_𝐽𝑢𝑛𝑖𝑜𝑟𝑖,𝑡=0 = 3 ∗ 𝑅𝑊𝐹 ̅̅̅̅̅̅̅ 𝑖 ;  𝑇 = duration of ABS-JUNIOR provided in the OPERATION PROGRAM. 5. The corrective risk weight factor is specific to each ORIGINATOR bank “i” (𝛿𝑖,𝑡) and is determined based on the following formula: 𝛿𝑖,𝑡 = −∆𝑡 ∗ { 1 𝑀𝐶𝑅 − [𝑅𝑊𝐹_𝐽𝑢𝑛𝑖𝑜𝑟𝑖,𝑡=0 + (𝑡 − 1) ∗ 𝜇𝑖 ]} where:  𝛿𝑖,𝑡 = corrective risk weight factor to be applied by ORIGINATOR bank “i” to ABS-JUNIOR with reference to year “t”;  ∆𝑡 = deviation between cumulative net cash flows actually realized and cumulative net cash flows expected with reference to year “t”;  𝑀𝐶𝑅 = minimum capital ratio equal to 8%;  𝑅𝑊𝐹_𝐽𝑢𝑛𝑖𝑜𝑟𝑖,𝑡=0 = 3 ∗ 𝑅𝑊𝐹 ̅̅̅̅̅̅̅ 𝑖 ;  𝜇𝑖 = constant annual additional risk weight factor specific to ORIGINATOR bank “i”. 6. The deviation between cumulative net cash flows actually realized and cumulative net cash flows expected, relative to the total of ASSETS SUBJECT TO SYSTEM SECURITIZATION (∆𝑡), is the same for all ORIGINATOR banks and is determined based on the following formula: ∆𝑡= ( ∑ 𝐶𝐹𝑡 − 𝑡−1 𝑡=0 ∑ 𝐸𝑥𝑝𝐶𝐹𝑡 𝑡−1 𝑡=0 ∑ 𝐸𝑥𝑝𝐶𝐹𝑡 𝑡−1 𝑡=0 ) where:  ∆𝑡 = deviation between cumulative net cash flows actually realized and cumulative net cash flows expected with reference to year “t”;  ∑ 𝐶𝐹𝑡 𝑡−1 𝑡=0 = accumulation up to year “t-1” of net cash flows realized from the total of ASSETS SUBJECT TO SYSTEM SECURITIZATION;  ∑ 𝐸𝑥𝑝𝐶𝐹𝑡 𝑡−1 𝑡=0 = accumulation up to year “t-1” of net cash flows expected from the total of ASSETS SUBJECT TO SYSTEM SECURITIZATION in the OPERATION PROGRAM. 7. Once the remaining life of ABS-JUNIOR is less than half of their initial duration provided in the OPERATION PROGRAM, if the cumulative net cash flows actually realized allow, at the reference date, a potential repayment of ABS-JUNIOR of at least 50% of their nominal value, the CENTRAL BANK may establish the application of a specific risk weight factor, lower than that resulting from the application of the rules recalled above, subject to the minimum level established by the preceding paragraph 1. 4. PRUDENTIAL REGIME FOR ESCROW ACCOUNT

1. For the purposes of calculating the capital ratio as defined in Article VII.III.2 of BCSM REGULATION NO. 2007-07, ORIGINATOR banks include the ESCROW ACCOUNT among risk assets, applying the provisions on the two-stage process set out in paragraphs 1 and 2 of Article VII.III.8 of the same BCSM REGULATION NO. 2007-07 and adopting the following criteria: a) at the first stage, the credit conversion factor for the calculation of the credit equivalent amount is set at 100 percent; b) at the second stage, the credit equivalent amount derived from the first stage referred to in the preceding letter a) is weighted by the risk weight factor of 75 percent applied to ABS-SENIOR pursuant to what is provided in sub-paragraph 3.1, without any reduction of the risk weight factor even in the case of INSURANCE GUARANTEE or STATE GUARANTEE.
2. ENTRY INTO FORCE
3. This Circular enters into force on 30 November 2022.