Weighted average maturity in securitisations

In accordance with the new CRR regulations for securitisations in force since 1 January 2019, the maturity of tranches must be taken into account as an additional factor when calculating risk-weighted exposure levels based on the external-ratings-based approach (SEC-ERBA) and the internal-ratings-based approach (SEC-IRBA). Art. 257 (1) CRR specifies that banks can choose between two approaches: the weighted average maturity (WAM) of the contractual payments due under the tranche or the final legal maturity of the tranche. Art. 257 (4) CRR also stipulates that the European Banking Authority (EBA) is to monitor the various procedures for determining the WAM and issue guidance with a view to harmonising the way the calculation method is applied.

On 31 July 2019, the EBA published a draft of this guidance. In the consultation, the EBA also outlines current market practice regarding the calculation carried out by banks of the WAM of securitisation transactions on the basis of surveys and also describes how the banks choose between the two approaches. In the cash flow models the tranches are based on the contractual payments of both the borrower to the originator (asset model) and the securitisation special purpose entity (SSPE) to the tranche holders (liability model) are taken into consideration. As regards the asset model, nearly all banks make provisions for any early prepayments, but not in a consistent manner. Potential delays in payment or defaults are less frequently included when calculating the WAM, even if expectations of losses are justified. In the liability model, the payments are shown based on the provisions of the transaction documents. Clean-up calls are also reflected in the models applied by the banks.

Banks generally assume that final legal maturity leads to more conservative estimates, so that the WAM tends to be preferred. Irrespective of this, factors such as data availability, the complexity of internal models and the repayment structure of the securitisation transaction have an impact on which of the two approaches is chosen. The draft guidance published sets out basic principles when using the WAM approach. The main objective is to ensure comparability, reliability, applicability and consistency when applying the approach.

The draft guidance covers the following aspects in particular:

1. Payments that are contractually due within the tranche

In the case of traditional securitisations, the contractually binding payments to the SSPE under an asset model and the payments to the investors of the tranches under a liability model must be factored in. In the case of synthetic securitisations, the originator’s contractually binding payments to the protection provider must be modelled.

2. Data and information requirements

Banks that are servicers of the underlying securitised exposures are to use internal data. When banks don’t have internal data, external data sources are to be used, including those provided under article 7 of the Securitisation Regulation. The data on the underlying exposures must be complete. The transaction documents are the primary source used to inform investors of cash flows and of further information on the securitisation transaction.

3. Method for determining contractual payments in the asset and liability model

In addition to general requirements regarding the asset model, the EBA also lays down specific rules for the underlying exposures, in particular repayment and interest payments, revolving periods, prepayments, possible future defaults, cash accounts and other investments, taking into account contractual agreements and contractually agreed triggers with regard to the securitised exposures. The EBA also looks at non-performing exposures and makes assumptions on the revenues from selling these and the vintage. With regard to the liability model, the EBA also sets out, in addition to general requirements, specific rules for determining the total cash flows to investors and for allocating payments to investors in the tranche, including structural features, optional elements and the amortisation structure.

4. Implementation and use of the WAM model

Furthermore, the draft guidance states that the WAM model is to be regularly updated and validated and subjected to a quality check too.

Users will be given the opportunity to comment on this paper until 31 October. These comments will be incorporated in the development of the final guidance by 31 December 2019.

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Andrea Flunker
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Martin Josek
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+49 151 58072789