On 11 December 2014, the Basel Committee on Banking Supervision (BCBS) published a final Basel III Document (BCBS d303)1 on changes to the international model rules for banks’ calculation of credit risk capital requirements for exposures to securitisation transactions (Revised Framework). The Revised Framework follows the BCBS’s first consultative document on this subject (BCBS 236) published in December 2012,2 and its second consultative document (BCBS 269), published in December 2013 (Second Proposal),3 and includes the text of the Revised Framework that will replace the securitisation framework set out in the Basel II capital requirements framework as amended.4 The Revised Framework is to be implemented by BCBS member countries by the beginning of 2018. Overall, the Revised Framework is very similar to the draft rules set out in the Second Proposal, though there are some significant changes as discussed below. Main elements are as follows: To determine its credit risk capital requirement for a securitisation exposure, a bank will apply one of several approaches according to the following hierarchy (if the bank meets the applicable conditions to apply that approach to that exposure): an Internal Ratings-Based Approach (IRBA) based on the internal ratings-based approach (IRB) capital charge for the underlying securitised exposures (KIRB); where permitted under the laws of the bank’s jurisdiction, either an External Ratings-Based Approach (ERBA), which determines risk weights based on qualifying credit rating agency ratings and other variables, or, in the case of unrated exposures to asset-backed commercial paper (ABCP) conduits, the Internal Assessments Approach (IAA) from the Basel II IRB; or a Standardised Approach (SEC-SA), which determines risk weights using a relatively simple formula applied to the capital requirement for the underlying assets determined under the Basel II standardised approach (SA). If the bank is not able to apply any of these approaches to a particular securitisation exposure, then generally it must assign a 1,250% risk weight to the exposure. Regardless of the approach used, the capital requirement for any securitisation exposure will be subject to a 15% risk weight floor (except that a lower risk weight may apply if the maximum risk weight or maximum capital requirement provisions are applicable and give a lower risk weight according to the weighted average risk weight or the capital requirement of the underlying pool of exposures). Under both the IRBA and the ERBA, risk weights will vary according to maturity of the securitisation exposure, with a minimum of one year and a maximum of five years. For this purpose, the tranche maturity will be determined based on mandatory contractual cash flows of the securitisation tranche rather2 Mayer Brown | Revisions to Basel Securitisation Framework – Final Rules than contractual or expected cash flows of the underlying assets. Based on the ERBA risk weights and other statements in the Revised Framework, risk weights under the Revised Framework for relatively high quality securitisation tranches (and especially those not having short contractual maturities) will in general be substantially higher than under the Basel II IRB. The hierarchy and characteristics of approaches used to determine the credit risk capital requirement and certain other changes from Basel II included in the Revised Framework are described in more detail in our previous legal update on the Second Proposal.5 Changes from Second Proposal While the Revised Framework generally follows the Second Proposal, it includes the following significant changes: In response to comments that the use of legal final maturity of securitisation tranches (rather than contractual maturity or weighted average life of underlying assets) is unduly conservative, the BCBS adjusted the definition of maturity to “haircut” the legal final maturity.6 Rather than being equal to legal final maturity, tranche maturity will equal one year plus 80% of the excess of legal final maturity over one year.7 For example, if the legal final maturity of a tranche is two years, its tranche maturity under the Revised Framework will be 1.8 years, and if the legal final maturity a tranche is five years, its tranche maturity will be 4.2 years. In addition, in the ERBA risk weight table for long-term ratings, the risk weights prescribed for five year maturities (except for very low-rated tranches) are moderately lower than those in the Second Proposal.8 For any exposure with a legal final maturity longer than one year and not longer than six years, under IRBA or ERBA, other things being equal, these changes will result in somewhat lower capital requirements than under the Second Proposal. To enable banks that use the IRB approach to apply IRBA to more of their securitisation exposures, the Revised Framework adapts the “top-down” approach set out in Basel II for purchased receivables so that banks can use it for securitisation exposures generally, subject to some conditions.9 At the same time, the Revised Framework requires banks to recognise dilution risk, and not only credit risk, in calculating capital requirements for securitisation exposures, unless a bank can demonstrate to its supervisor that the dilution risk is immaterial.10 In Basel II, assessment of dilution risk is required in the purchased receivables provisions,11 in credit risk mitigation provisions on using receivables as collateral,12 and in the IAA for ABCP conduit exposures,13 but not in the securitisation framework generally. As to “mixed pools,” as to which a bank can determine IRB inputs for some, but not all, the underlying exposures, the Revised Framework will allow the bank to apply the IRBA (using IRB inputs where available and SA risk weights for the remaining exposures) only if the bank can determine IRB inputs for at least 95% of the exposures. Otherwise, the bank must apply the ERBA (where allowed), the IAA (if applicable) or, if the bank cannot apply the ERBA or the IAA, the SEC-SA.14 This replaces the Basel II rule which allowed a bank to calculate capital based on KIRB of the underlying pool of exposures if it could apply the IRB approach to a “predominant share” of those exposures.15 Similarly, under the Revised Framework, in order to apply the SEC-SA to a securitisation position, a bank must know the delinquency status for at least 95% of the underlying exposures; otherwise it must assign a 1,250% risk weight to that position.163 Mayer Brown | Revisions to Basel Securitisation Framework – Final Rules A bank that holds an unrated securitisation exposure under an interest rate or currency swap may apply a risk weight to that exposure according to the risk weight for a pari passu position, and not only (as under Basel II) for a position that is fully subordinated to the unrated exposure.17 More generally, for any unrated securitisation position, a rating may be inferred from the rating of either a rated pari passu tranche or, if there is no pari passu tranche, a rated subordinated tranche.18 The capital requirements cap (under which a bank’s capital requirement will not exceed the capital requirement for the underlying pool of exposures if they were all held by the bank directly) will be applied proportionally based on the largest portion of any tranche held by the bank.19 For example, if the bank’s capital requirement for the underlying exposures would be 100 and the bank holds 25% of a senior tranche and 20% of a junior tranche, if the bank is allowed to apply the capital requirements cap, the bank’s aggregate capital requirement for those securitisation positions will not exceed 25. For any resecuritisation exposure (that is, an exposure to a securitisation in which any underlying exposure is a securitisation exposure), the risk weight will not be less than 100% (vs. 20% under Basel II.5),20 and will not be limited by the risk weight and capital requirements caps that apply to other securitisation exposures.21 The definition of “ABCP programme” is amended to say that such a programme predominantly issues commercial paper “to third party investors.”22 If “predominantly” is to be read to mean a very high percentage (like the 95% applied to information requirements in the IRBA and SEC-SA), then this change could prove challenging for banks that wish to use the IAA (other than banks in the US where the IAA is not available) in relation to their ABCP conduit programmes and that also need to buy commercial paper or otherwise provide funds to the conduit in order to comply, for example, with US risk retention requirements. The provisions on “overlapping exposures” have been amended to clarify the meaning of that term and to allow a bank to “split or expand” exposures in appropriate cases to arrive at an overlap for purposes of calculating the capital requirements.23 The amended provisions should help avoid anomalous results for banks providing both liquidity facilities and programme enhancement facilities to ABCP conduits. While maintaining that “[f]or structures involving [a special purpose entity (SPE)], all the SPE’s exposures are to be treated as exposures in the pool,” the Revised Framework allows that “the bank can exclude the SPE’s exposures from the pool for capital calculation purpose if the bank can demonstrate to its national supervisor that the risk of the SPE’s exposures is immaterial (for example, because it has been mitigated [footnote omitted]) or that it does not affect the bank’s securitisation exposure.”24 For example, provisions for cash collateralisation and counterparty credit quality standards could reduce or eliminate the SPE’s exposure to credit risk of the SPE’s swap counterparty, and (if accepted by the bank’s national supervisor) could thus enable a bank to exclude that counterparty credit risk when calculating its credit risk capital requirement for investment in the SPE’s asset-backed notes.25 The definitions of attachment point (A) and detachment point (D) have been amended, among other things, to clarify the treatment of reserve accounts.26 Wording has also been added to clarify that sequential-pay tranches are aggregated for purposes of calculating A and D.274 Mayer Brown | Revisions to Basel Securitisation Framework – Final Rules Joint Associations’ Comments and Results Some of the changes from the Second Proposal that are reflected in the Revised Framework respond in whole or part to comments made by a number of financial industry associations on the Second Proposal.28 However, many of the associations’ most important comments, including proposals to recalibrate the IRBA, ERBA and SEC-SA with different inputs for different asset classes, were not adopted. The Annex attached to this legal update sets out the joint associations’ main comments on the Second Proposal and the results found in the Revised Framework. What Happens Next? Concurrently with the Revised Proposal, the BCBS, together with the Board of the International Organization of Securities Commissioners (IOSCO), published a consultative document on “Criteria for identifying simple, transparent and comparable securitisations ,”29 requesting comments by 13 February 2015. This follows a consultation by the European Banking Authority on “simple standard and transparent securitisations”30 and, during 2014, among other developments, the publication by the Bank of England and the European Central Bank of a discussion paper setting out draft principles for “qualifying securitisations” and the adoption by the European Commission (EC) of delegated regulations providing relatively favourable treatment of securitisations meeting certain criteria for purposes of the Basel III liquidity coverage ratio as in effect in the European Union31 and for purposes of insurance company capital requirements.32 If the BCBS and IOSCO, following their consultation, adopt criteria for defining a “qualifying securitisation” (or whatever term is used), they will probably recommend that transactions meeting those criteria will be entitled to more favourable treatment for certain regulatory purposes, including possibly for purposes of bank capital requirements. The BCBS, in its Introduction to the Revised Framework, referred to the BCBS/IOSCO consultation and said that in 2015 the BCBS “will consider how to incorporate such criteria into the securitisation capital framework.”33 This will provide an opportunity for continuing dialog between the financial industry and the regulatory community about the Revised Framework. Financial industry representatives will look forward to further discussions with BCBS and other regulatory bodies not only about the development and use of the “qualifying securitisation” criteria but also concerning interpretive questions that arise under the Revised Framework, implementation of the Revised Framework in national laws and regulations, and possibly, a small number of other important improvements to the Revised Framework. For questions or comments on this Legal Update please contact any of the following: Kevin Hawken +44 20 3130 3318 firstname.lastname@example.org J. Paul Forrester +1 312 701 7366 email@example.com Carol A. Hitselberger +1 704 444 3522 firstname.lastname@example.org Jason H.P. Kravitt 1 212 506 2622 email@example.com Stuart M. Litwin +1 312 701 7373 +1 212 506 2389 firstname.lastname@example.org Mayer Brown | Revisions to Basel Securitisation Framework – Final Rules Endnotes 1 BCBS, Revisions to the Basel Securitisation Framework – Basel III Document (11 Dec. 2014), available at https://www.bis.org/bcbs/publ/d303.pdf. Citations in this paper to numbered paragraphs of BCBS d303 refer to the standards text; citations to page numbers refer to the Introduction. 2 BCBS, Revisions to the Basel Securitisation Framework – Consultative Document (Dec. 2012), available at http://www.bis.org/publ/bcbs236.pdf. Our summary of the first consultative document is available at http://www.mayerbrown.com/revisions-baselframework/. 3 BCBS, Revisions to the Basel Securitisation Framework – Consultative Document (Dec. 2013), available at http://www.bis.org/publ/bcbs269.pdf. 4 BCBS, Basel II: International Convergence of Capital Measurement and Capital Standards: A Revised Framework – Comprehensive Version (Jun. 2006), available at http://www.bis.org/publ/bcbs128.pdf (BCBS 128); BCBS, Enhancements to the Basel II framework (Jul. 2009), available at http://www.bis.org/publ/bcbs157.pdf (BCBS 157); BCBS, Revisions to the Basel II market risk framework – final version (Jul. 2009), available at http://www.bis.org/publ/bcbs158.pdf (BCBS 158). 5 Mayer Brown, Revisions to Basel Securitisation Framework – Second Consultative Document (22 Jan. 2014), available at http://www.mayerbrown.com/Revisions-to-BaselSecuritisation-Framework---Second-ConsultativeDocument-01-22-2014/. 6 BCBS d303 page 4. 7 Id. para. 22. 8 Id. para. 68 and Table 2; cf. BCBS 269 Annex I (rules text) para. 60. 9 Id. paras. 50-50(c). 10 Id. para. 52. 11 BCBS 128 paras. 362-373, 491, 495. 12 Id. para. 518. 13 Id. para. 620. 14 BCBS d303 para. 47. 15 BCBS 128 para. 607. 16 BCBS d303 para. 83. 17 Id. paras. 63 (IRBA), 83 (ERBA), 86 (SEC-SA). 18 Id. para. 73(a) (“The reference securitisation exposure (eg asset-backed security) must rank pari passu or be subordinate in all respects to the unrated securitisation exposure.”). However, para. 72 states that the operational requirements for inferred ratings in para. 73 “are intended to ensure that the unrated position is senior in all respects to an externally rated securitisation exposure termed the ‘reference securitisation exposure.’“ We assume that this is an oversight and para. 72 should be read as conformed to be consistent with para. 73(a) and the provisions related to interest rate and currency swaps. 19 Id. para. 92. 20 BCBS 157 page 3. 21 BCBS d303 para. 96-97. 22 Id. para. 8. 23 Id. paras. 39-40 and footnote 16. 24 Id. para. 49 (IRBA). Similar wording appears in para. 79 (SEC-SA). 25 Id. footnote 20. 26 Id. paras. 53-55. 27 “Where the only difference between exposures to a transaction is related to maturity, A and D will be the same.” Id. para. 48 (IRBA), para. 78 (SEC-SA). 28 Commercial Real Estate Finance Council (CREFC), Commercial Real Estate Finance Council Europe (CREFC Europe), Global Financial Markets Association (GFMA), Institute of International Finance (IIF), International Association of Credit Portfolio Managers (IACPM), International Swaps and Derivatives Association (ISDA), Securitisation Forum of Japan (SFJ) and Structured Finance Industry Group (SFIG), “Joint Associations’ response to the second Consultative Document on Revisions to the Basel securitisation framework” (letter dated 24 Mar. 2014), available at http://www.bis.org/publ/bcbs269/jtagcceiiisas.pdf. 29 Available at http://www.bis.org/bcbs/publ/d304.pdf. 30 EBA Discussion Paper on simple standard and transparent securitisations (14 Oct. 2014), available at http://www.eba.europa.eu/-/eba-consults-on-simplestandard-and-transparent-securitisations-and-theirpotential-regulatory-recognition. The consultation runs until 14 January 2015. 31 EC, Commission Delegated Regulation (EU) No …/.. of 10.10.2014 to supplement Regulation (EU) 575/2013 with regard to liquidity coverage requirement for Credit Institutions (10 Oct. 2014), available at http://ec.europa.eu/internal_market/bank/docs/regcapit al/acts/delegated/141010_delegated-act-liquiditycoverage_en.pdf, Article 13 (Level 2B securitisations). 32 EC, Commission Delegated Regulation (EU) No …/.. of ... supplementing Directive 2009/138/EC of the European6 Mayer Brown | Revisions to Basel Securitisation Framework – Final Rules Parliament and of the Council on the taking-up and pursuit of the business of Insurance and Reinsurance (Solvency II), available at http://ec.europa.eu/internal_market/insurance/docs/solv ency/solvency2/delegated/141010-delegated-act-solvency- 2_en.pdf, Article 177 (type 1 securitisation positions). 33 BCBS d303 page 1. 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This publication provides information and comments on legal issues and developments of interest to our clients and friends. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek legal advice before taking any action with respect to the matters discussed herein. © 2014 The Mayer Brown Practices. All rights reserved.7 Mayer Brown | Revisions to Basel Securitisation Framework – Final Rules Annex COMMENTS ON SECOND PROPOSAL AND RESULTS IN REVISED FRAMEWORK The following table shows the main comments set out in the Joint Associations’ letter to the BCBS dated 24 April 2014 on the Second Proposal and, next to each comment, the result in the final Revised Framework. Citations to paragraph numbers refer to BCBS d303 standards text unless otherwise indicated. TOPIC COMMENT RESULT CALIBRATION BY ASSET CLASS Recalibrate the IRBA and the standardised approach (SA) according to asset class so that securitisation capital requirements are brought more closely into line with historical loss experience for most asset classes, with capital requirements for other forms of finance and with those for the underlying asset pools. No calibration by asset classes. Formulation and calibration of IRBA and SA are substantially unchanged from BCBS 269, except for adjustment to calculation of tranche maturity (see below). CALIBRATION BETWEEN APPROACHES; IRBA OPERATION CONDITIONS Adjust the calibration of approaches in relation to each other so that IRBA generally produces lower rather than higher risk weights than other approaches for the same exposures. If that is achieved, allow banks and supervisors to develop more flexible approaches to application of operating conditions so that banks can use the IRBA based on information they can get when acting as investors. Definition of tranche maturity (para. 22) and ERBA calibration (para. 68) have been adjusted to moderately reduce capital levels at longer maturities; calibrations of IRBA and ERBA otherwise unchanged. Para. 50 allows IRB banks to apply purchased receivables “top-down approach” from Basel II IRB to calculate Kirb under certain conditions. Para. 50(c) adapts the purchased receivables rules to apply to asset-backed securities; e.g. requirements for “effective control and ownership” must be met by a trustee or other person on behalf of investors if not by the bank directly. Certain requirements may limit originators’ usual flexibility, e.g., to adjust credit granting and servicing terms (see, e.g., BCBS 128 para. 497). Para. 52 requires banks to calculate capital for dilution risk per BCBS 128 para. 369 (whether or not using the top-down approach). Paras. 52(a)-(b) and Annex 1 set out further requirements and examples for separate calculation of dilution and default risk.8 Mayer Brown | Revisions to Basel Securitisation Framework – Final Rules TOPIC COMMENT RESULT MATURITY VS WEIGHTED AVERAGE LIFE Amend the definition of maturity (M) to allow use of published weighted average life (WAL) tables where available and to take into account expected prepayments based on supervisory inputs, contractual maturity of the underlying exposures and, in replenishing transactions, early termination triggers and contractual limits on average maturity of underlying exposures. Maturity still means tranche maturity (as in original proposal), and is still based on legal final maturity (or weighted average maturity of tranche unconditional scheduled payments, if any), with minimum one year and maximum five years. Tranche maturity adjusted to mean one year plus 80% of excess of legal final maturity over one year; e.g., if legal final maturity is five years, tranche maturity will be 4.2 years. ERBA risk weights for five-year tranche maturities also reduced. CALIBRATE P-VALUES PER ASSET CLASS Change the formulation and calibration of p in IRBA to provide for different parameters for different asset classes, to limit the maximum p of senior and non-senior tranches to certain percentages, and to lower the floor value of p. No calibration by asset classes. Except for tranche maturity adjustment (para. 22), added provisions on “top-down” approach and dilutions (paras. 50, 52) and change related to swaps (para. 63 last sentence), IRBA formulation and calibration are substantially unchanged from BCBS 269 (paras. 48-64). CALIBRATION OF ERBA RELATIVE TO IRBA Recalibrate the ERBA in order to achieve a better alignment of its results in relation to IRBA (which should generally produce lower rather than higher risk weights than ERBA) and in relation to SA (with which it should be broadly aligned). Definition of tranche maturity for IRBA and ERBA (para. 22) adjusted as described, and ERBA risk weights for five year maturity have been reduced. To be determined whether correspondence IRBA and ERBA has improved or not. SWAP INFERRED RATINGS For securitisation exposures under interest rate and currency swaps, allow the use of inferred ratings based on either the pari passu tranche or the next subordinated tranche. Done: Para. 63 (IRBA) last sentence says “The risk weight for market risk hedges such as currency or interest rate swaps will be inferred from a securitisation exposure that is pari passu to the swaps or, if such an exposure does not exist, from the next subordinated tranche” (added words in italics). The same change has been made in paras. 69 (ERBA) and para. 86 (SEC-SA) in relation to swaps and in para. 73 (ERBA) with respect to inferred ratings generally. IAA APPROVALS We wish to confirm that, as is the case today under the Basel II internal ratings-based approach (IRB), banks should consult with and seek approval from their respective national regulators for the use of the IAA including any requirements for the existence of a certified IRB approach for a portion of the underlying exposures. Para. 74 addresses the concern that banks might need to have IRB approvals for relevant underlying exposures by saying that a bank (with supervisory approval) may use IAA “provided that the bank has at least one IRB model (which does not need to be applicable to the securitised exposures).” Otherwise, the IAA provisions are substantially unchanged (paras. 74-77).9 Mayer Brown | Revisions to Basel Securitisation Framework – Final Rules TOPIC COMMENT RESULT IAA APPLICATION TO EXPOSURES OTHER THAN IN ABCP CONDUITS Allow for IAA application to unrated securitisation exposures funded directly by banks in addition to those held in banksupported asset-backed commercial paper (ABCP) conduit programmes. No change. IAA remains available only for unrated exposures to ABCP conduits where the bank is not able to apply IRBA (para. 74). SA PARAMETERS PER ASSET TYPES Adjust the standardised approach (SA) to provide more risk sensitivity by specifying different parameters for different asset types. SA formulation and calibration are substantially unchanged (paras. 78-87), except to provide for adjusted calculation where delinquency status is unknown for up to 5% of underlying exposures; if unknown for more than 5% then the whole securitisation exposure must be risk weighted at 1,250% (para. 83). EMBEDDED SWAPS AND CASH COLLATERAL In relation to embedded swaps and cash collateral, require no additional capital if counterparties and structure meet certain criteria, and, where additional capital is required, allow use of proxies for calculation of present value (PV). Paras. 49 and 79 allow that the bank can exclude the SPE’s exposures from the pool for capital calculation purposes if the bank can demonstrate to its national supervisor that the risk of the SPE’s exposures is immaterial (for example, because it has been mitigated) or (para. 49 only) “that it does not affect the bank’s securitisation exposure.” Footnotes (20 and 25) to these paras. refer to market practices for cash collateralisation of swap exposures and minimum credit quality of swap providers. LOWER RW FLOOR Provide a lower risk weight floor of 10%. No change. Risk weight floor remains at 15% (paras. 64, 70, 87). CAPITAL REQUIREMENTS CAP AND SA BANKS AS INVESTORS Allow banks that apply the SA as well as those applying advanced approaches to use the capital requirements cap when acting as investors, provided they have the information needed to calculate the cap under the SA. No change. Banks using IRB for the underlying exposures may apply the cap based on Kirb when acting as originator, sponsor or investor (para. 90). Banks using SA for the underlying exposures may apply the cap based on Ksa when acting as originator or sponsor but not as investor (para. 91). CAPITAL REQUIREMENTS CAP PROPORTIONAL APPLICATION Allow banks to apply the capital requirements cap to a securitisation transaction on a proportional basis according to the largest portion that the bank holds in any tranche of the securitisation or, in the case of a “vertical slice” of all credit risk tranches in a securitisation, according to the riskweighted asset amount (RWA) of the vertical slice divided by the RWA of the pool. Para. 92 provides for such proportional treatment (but not the separate formula for vertical slice).10 Mayer Brown | Revisions to Basel Securitisation Framework – Final Rules TOPIC COMMENT RESULT OVERLAP IN ABCP LIQUIDITY AND PROGRAMME CREDIT ENHANCEMENT EXPOSURES Confirm that aggregate capital requirements for an ABCP conduit sponsor bank’s exposures under liquidity facilities and programme credit enhancement facilities aggregating 100% or more of the ABCP conduit liabilities will not exceed the aggregate capital associated with the underlying securitisation exposures in the programme. Paras. 39-40 restate the treatment of overlapping exposures formerly covered by BCBS 128 para. 581 and para. 565(g)(iii) (added by BCBS 157). Para. 40 would appear to allow a bank providing partial support liquidity and programme credit enhancement to “expand its exposures” under the liquidity facilities to effectively treat them as “full support” so they would “preclude all losses” on the enhancement, in which case “the bank would only need to calculate capital requirements on the liquidity facility.” RESECURITISATION WORDING ON RETRANCHING Refine the wording on resecuritisation to clarify that retranchings of individual ABS transactions and structures that simply aggregate such retranchings without adding more correlation risk will not be treated as resecuritisations. Para. 5 third sentence rewritten, apparently in order to state the concept more precisely. Revised wording refers only to retranching of a single securitisation exposure, so does not cover structures that combine retranchings of several transactions, and may not cover even retranchings of contiguous tranches of a single pool. BCBS 269: “Exposures resulting from retranching are not resecuritisation exposures if, after retranching, they act like a direct tranching of a pool with no securitised assets.” BCBS 303: “An exposure resulting from retranching of a securitisation exposure is not a resecuritisation exposure if the bank is able to demonstrate that the cash flows to and from the bank could be replicated in all circumstances and conditions by an exposure to the securitisation of a pool of assets that contains no securitisation exposures.” Additionally, resecuritisation exposures will be subject to a floor risk weight of 100%, and risk weight and capital requirements caps will not apply (paras. 96-97). DUE DILIGENCE – PENALTY FOR NONCOMPLIANCE Amend the securitisation due diligence rule to replace the 1,250% risk weight penalty with a proportional additional risk weight as provided in the European Union (EU) Capital Requirements Regulation (CRR) Article 407. No change. The penalty for non-compliance remains 1,250% risk weight (para. 31).