NBB Circular NBB_2020_30: EBA Guidelines on Determining the Weighted Average Maturity of the Tranche under Article 257(1)(a) of Regulation (EU) No 575/2013

NBB_2020_30 – 28 July 2020 Circular – Page 1/3 14 Berlaimont Boulevard – BE-1000 Brussels tel.: +32 2 221 24 33 company number: 0203.201.340 RPM Brussels www.bnb.be

Circular
Brussels, 28 July 2020
Reference: NBB_2020_30 your contact person:
Lisanne Vanderstappen tel.: +32 2 221 41 97 lisanne.vanderstappen@nbb.be

EBA Guidelines on the determination of the weighted average maturity of the tranche, in accordance with Article 257(1)(a) of Regulation (EU) No 575/2013

Scope
Credit institutions not subject to the direct prudential supervision of the European Central Bank 1, securities firms, and branches established in Belgium of credit institutions and securities firms governed by the law of a non-EEA country, both on a consolidated and on an individual basis.

Summary/Objective
Regulation (EU) No 575/2013 2, as amended by Regulation (EU) 2017/2401 3, establishes the tranche maturity as a complementary parameter "MT" for the calculation of capital requirements applicable to exposures located in a tranche of a securitisation. To determine the maturity of a tranche, institutions may use two alternative approaches:
i) the weighted average maturity of the contractual payments due under the tranche, in accordance with Article 257(1)(a) (hereinafter the "weighted average maturity approach"); ii) the final legal maturity of the tranche, in accordance with Article 257(1)(b).
These two methods are subject to a floor of one year and a cap of five years.
The objective of these guidelines is to provide guidance to institutions wishing to use the weighted average maturity approach rather than the final legal maturity approach. The way in which the methodology applicable to the weighted average maturity approach is specified by the European Banking Authority in these guidelines aims to ensure that this approach can be applied in a harmonised and sufficiently prudent manner and used by less advanced institutions, and that it is sufficiently simple to facilitate supervision by competent authorities.

1 The list of institutions subject to the direct prudential supervision of the ECB is available at the following internet address: https://www.bankingsupervision.europa.eu/banking/list/who/html/index.en.html.
2 Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012.
3 Regulation (EU) 2017/2401 of the European Parliament and of the Council of 12 December 2017 amending Regulation (EU) No 575/2013 as regards the prudential requirements for credit institutions and investment firms.

Circular – Page 2/3 NBB_2020_30 – 28 July 2020

Dear Sir, Dear Madam,

By this circular, the National Bank of Belgium (hereinafter the "Bank") intends to indicate that the guidelines of the European Banking Authority (hereinafter the "EBA") (EBA/GL/2020/04) on the determination of the weighted average maturity of the tranche, in accordance with Article 257(1)(a) of Regulation (EU) No 575/2013, have been integrated into its supervisory practice. This circular contains a brief summary of these guidelines, which can be consulted in both national languages on the EBA website via the following link:
https://eba.europa.eu/regulation-and-policy/securitisation-and-covered-bonds/guidelines-on-the-determination-of-the-weighted-average-maturity-of-contractual-payments-due-under-the-tranche-of-a-securitisation-transaction.

Institutions using the internal ratings-based or external ratings-based approaches (respectively "SEC-IRBA" and "SEC-ERBA") must adopt the tranche maturity as a complementary parameter "MT" to calculate the risk-weighted exposure amounts for securitisation positions.
These guidelines aim to clarify the following aspects of the weighted average maturity approach:
(i) for classic and synthetic securitisations, a determination of the contractual payments due under the tranche; (ii) requirements related to data sources and data relating to the underlying pool of exposures as well as information on the securitisation transaction; (iii) an asset model or a method for determining the contractual payments due to the Securitisation Special Purpose Entity (SSPE); (iv) a liability model or a method for determining the contractual payments due by the SSPE to tranche holders in the case of classic securitisations; (v) a method for determining the contractual payments due under the tranche in the case of synthetic securitisations; (vi) requirements related to the monitoring and implementation of the weighted average maturity approach.

Given the different sources of cash flows generated in the case of classic and synthetic securitisation, the EBA guidelines specify two different methods for calculating the weighted average maturity of a tranche.

(i) Contractual Payments
Contractual payments due under the tranche in the context of a classic securitisation consist of a combination (i) of the contractual payments of the underlying exposure due to the SSPE and (ii) of the contractual payments due by the SSPE to the holders of the tranche.
Contractual payments due under the tranche in the context of a synthetic securitisation are considered, when the tranches are subject to credit protection, to be the sum (i) of the contractual payments of the premiums due by the originator to the provider of credit protection for the protected tranche and (ii) of the contractual payments due to the originator by the borrowers of the underlying exposures which are allocated to the reduction of the tranche's outstanding amount. For tranches that are not subject to credit protection, the contractual payments are determined in the sense of point (ii).

(ii) Requirements related to data and information If the institution is also the manager of the securitised exposures, it must use internal data and, if the institution is not the manager, the guidelines specify which external data can be used.
The guidelines also specify which sources of information can be used and what adjustments are possible if the available data relating to the underlying pool of exposures for applying the asset model are incomplete. However, when data concerning the current principal balance or the currency of the underlying exposures are missing, the weighted average maturity approach cannot be used.

NBB_2020_30 – 28 July 2020 Circular – Page 3/3

(iii) and (iv) Asset model and liability model in the case of classic securitisations To determine the contractual payments due to the SSPE, institutions are required to use an asset model. All relevant information likely to have an impact on these payments, including principal, interest, and, where applicable, fees, must be used as key parameters for the asset model. Cash flows from non-performing exposures and performing exposures must be modelled separately, in accordance with these EBA guidelines. To determine the contractual payments due by the SSPE to tranche holders, institutions are required to use a liability model. The guidelines specify (1) which input variables must be used in the liability model, (2) what adjustments should be applied to the result of the asset model to take into account any cash flow resulting from hedging provisions and structural protection mechanisms, where applicable, as well as fees and costs borne by the SSPE and (3) how the allocation of contractual payments among tranche holders should appropriately reflect the conditions of the contractual agreement.

(v) Method for determining contractual payments in the case of synthetic securitisations Contractual payments due to the originator by the borrowers of the underlying exposures are determined by applying the same methodology as the asset model for performing exposures in the context of classic securitisations. These contractual payments are allocated to the tranches. If this allocation is not clearly defined in the conditions of the synthetic securitisation transaction, institutions cannot use the weighted average maturity approach. Contractual payments of premiums due by the originator to the provider of protection are determined in accordance with the contractual conditions of the transaction, as defined in the documentation relating to the securitisation transaction.

(vi) Monitoring and implementation of the weighted average maturity approach Finally, the EBA guidelines determine the requirements for model adjustments, use of third-party data providers, third-party models or internal models, control of the quality of asset and liability models, and application of the weighted average maturity approach to all securitisation positions. The French version of these EBA guidelines can be consulted on the Bank's website. A copy of this circular is sent to the auditor(s) and approved auditor(s) of your institution. This circular enters into force on 1 September 2020.

Please accept, Sir, Madam, the assurance of my distinguished consideration.

Pierre Wunsch
Governor

Appendix: 1 - only available at www.nbb.be
EBA Guidelines (EBA/GL/2020/04) of 4 May 2020 on the determination of the weighted average maturity of the tranche, in accordance with Article 257(1)(a) of Regulation (EU) No 575/2013