The European Banking Authority (EBA) today launched a public consultation on a draft guideline to determine the Weighted Average Maturity (WAM) of securitisation positions. This refers to Article 257 1 a) of the Capital Requirements Directive (CRR). The aim is a harmonised application of the calculation method and to ensure consistency and comparability in the application of the External Ratings Based Approach for the calculation of risk-weighted assets (SEC-ERBA), but the regulations are also relevant for the maturity calculation within the framework of the internal rating approaches (SEC-IRBA).
Key elements of the Consultation Paper
The maturity of the tranche was introduced as an additional risk factor as part of the new CRR regulations for securitisations to be applied since 1 January 2019. When determining the term of a tranche, two alternative approaches can be applied: the weighted average maturity of the contractual payments due under the tranche or the legal maturity of the tranche (final legal maturity).
The draft guidelines cover in particular:
(i) The significance of the contractual payments of a tranche,
(ii) the data and information requirements,
(iii) the methods used to determine both the contractual payments of the securitised exposures and the tranches issued, for traditional and for synthetic securitisations; and
(iv) the implementation and use of the WAM model.
The consultation process foresees a deadline of 31 October 2019 for comments and a public hearing at the EBA on 3 September 2019.
Implications of the Weighted Average Maturity Approach
The draft submitted by the EBA states that when using the Weighted Average Maturity approach, both the asset and liability sides of a securitisation transaction must be modelled within the framework of a cash flow model and on the basis of all the information available pursuant to Article 7 of the Securitisation Regulation (VV), including the cash flow model provided pursuant to Article 22 (3) VV. According to EBA, the weighted average maturity methodology should be conservative and take account of the principle of prudence. At the same time, excessive complexity should be avoided in order to facilitate monitoring by the competent authorities. Among other things, the draft reflects this by assuming a value of zero for prepayments, delinquencies and losses. However, the usual clean-up call can be taken into account at a rate of 10%.
In addition to the EBA's consultation questions, there are a number of other questions that need to be clarified with the EBA during the consultation phase. The TSI will actively accompany this process.
The TSI will also offer a corresponding TSI training course on cash flow modelling in December.