Instruction No. 2/2011 on Securitisation Operations

Instructions of Banco de Portugal

Instruction No. 2/2011

SUBJECT: Securitisation Operations

Considering the amendments introduced by Directive No. 2009/111/EC of the European Parliament and of the Council, of 16 September 2009 and by Commission Directive No. 2009/83/EC, of 27 July 2009, relating to securitisation operations, it becomes necessary to update the rules established in Instruction No. 13/2007.

Accordingly, Banco de Portugal, in the exercise of the powers conferred on it by Article 17 of its Organic Law, by Article 99 of the General Regime for Credit Institutions and Financial Companies, by Article 24 of Decree-Law No. 104/2007, of 3 April and by point 5 of No. 7 of Banco de Portugal Notice No. 7/2007, determines the following:

1. Points 3 and 4 of Instruction No. 13/2007 are amended as follows:

1- Point 3:

"3. In relation to each securitisation operation, it is presumed that the originating institution has transferred a significant portion of the credit risk of the exposures if the following conditions are met:

"(i) Non-retention of securitisation positions in tranches with an intermediate degree of subordination, whose own funds requirements are higher than 50% of the total requirements for those tranches. Tranches with an intermediate degree of subordination are understood to be securitisation positions to which a risk weight of less than 1 250% applies and which have a ranking lower than the highest ranking involved in the operation, as well as the ranking of the securitisation positions involved in the operation to which is assigned:

a) In the case of a securitisation position covered by Annex III, a credit quality step 1; or

b) In the case of a securitisation position covered by Annex IV, a credit quality step 1 or 2, assigned under Annex II.

(ii) Non-retention of securitisation positions in tranches of a high degree of subordination, in a percentage equal to or greater than 80% of the amount of each of those tranches. However, where in a given securitisation operation there are no securitisation positions with an intermediate degree of subordination and the originating institution can demonstrate that the value of the positions of a high degree of subordination is substantially higher than a reasonable estimate of the expected losses of the securitised positions, the originating institution may not retain more than 20% of the amount of the tranches of a high degree of subordination. Tranches of a high degree of subordination are understood to be those which, under Banco de Portugal Notice No. 7/2007, are subject to a 1250% risk weight or, alternatively, deducted from own funds;

(iii) …………………………………………………………………………………………………

(iv) …………………………………………………………………………………………………"

2- Point 4:

"4. Banco de Portugal may authorise that, despite the non-verification of some of the conditions provided for in point 3, the significant transfer of credit risk of exposures be recognised, if it considers that the originating institution applies policies and methodologies that ensure that the possible reduction in own funds requirements that the originating institution will obtain through the securitisation is justified by an equivalent transfer of credit risk to third parties. To this end, the originating institution must be able to demonstrate that this transfer of credit risk to third parties is also recognised for the purposes of the internal risk management of the credit institution and the internal allocation of its capital."

2. This Instruction enters into force on the date of its publication.