FSA is consulting on draft guidance that sets out its expectations on firms using the Supervisory Formula Method (SFM) to calculate risk-weighted exposure amounts (RWEAs) for unrated securitisation positions. FSA is worried that firms’ use of the SFM undermines the significant risk transfer requirement with the reduction in RWEAs because the use of the SFM is disproportionate to the credit risk transferred. FSA will generally expect firms to obtain a public rating on retained tranches to apply the Ratings-Based Approach (RBA) instead of using the SFM, in order to be happy there has been commensurate risk transfer. FSA hopes that by aligning firms’ capital requirements against the credit risk of retained securitisation positions, firms holding these positions should be more robust to losses on these exposures and have capital requirements that are more closely aligned to the risks they are running. FSA asks for comment by 22 June. (Source: FSA: Guidance consultation: Supervisory Formula Method and Significant Risk Transfer)