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AC
Overview
In May 2012, Basel introduced a new capital framework
titled a Fundamental Review of the Trading Book
(FRTB) that set out a number of specific measures
designed to modify trading book capital requirements.
After this, two consultative documents were published in
October 2013 and December 2014. The final FRTB
ruling is expected to be published in December 2015.
After publication, each country's regulators will modify
the ruling to conform to their jurisdiction. We expect the
final ruling to be implemented in early 2019. Regardless
of this lengthy timeframe, banks would most likely start
down a glide path towards the end target much sooner.
While banks can currently utilize either a standardized
approach (SSFA) or an internal ratings-based (model)
approach (IRB) to calculate capital, the FRTB demands
that a standardized approach be used for calculating
capital requirements for securitization positions held in
trading books. This proposed standardized approach is
comprised of three distinct capital charges: the default
risk capital charge, the enhanced delta plus risk capital
charge (essentially a market shock component), and a
residual risks add-on component. For securitization
exposures, these three components are defined and
calculated as follows:
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Residual risks add-on: The residual risks addon charge serves as a catch all for other,
potentially unforeseen risks. This charge is
calculated as 1% of a positions notional (face
value); as a result, this add-on is particularly
punitive for non-principal classes (i.e. interestonly bonds) as well as classes traditionally sold
at a deep discount.
Methodology
In the Appendix, we highlight the capital charges under
the existing SSFA formula and the new FRTB
methodology for non-agency RMBS, CMBS and ABS.
For clarity, let us work through our calculations for
JPMMT 2015-4 B1. At origination, this bond had 4.6%
credit support and a detachment point of 6.85%.
Assuming no 90+ delinquencies, the SSFA formula
under the current Basel III regime leads to a risk weight
of 560%. At a 10.5% capital rate, this translates into
capital charge of around 59% (=10.5% x 560%) of
market value.
AC
Sector
Credit Quality
RMBS - Prime
Senior IG
Multiplier
RMBS - Prime
Non-Senior IG
RMBS - Prime
HY
RMBS - Mid-Prime
Senior IG
RMBS - Mid-Prime
Non-Senior IG
13%
RMBS - Mid-Prime
HY
26%
RMBS - Subprime
Senior IG
RMBS - Subprime
Non-Senior IG
17%
RMBS - Subprime
HY
34%
CMBS
Senior IG
CMBS
Non-Senior IG
17%
CMBS
HY
34%
CLO
Senior IG
CLO
Non-Senior IG
12%
24%
4%
8%
16%
7%
9%
9%
6%
CLO
HY
Senior IG
Non-Senior IG
HY
Senior IG
Non-Senior IG
10%
HY
20%
ABS - Auto
Senior IG
ABS - Auto
Non-Senior IG
4%
7%
14%
5%
5%
10%
ABS - Auto
HY
20%
Other
Senior IG
34%
Other
Non-Senior IG
34%
Other
Source: J.P. Morgan
HY
34%
Under the new FRTB ruling, the capital charge using the
SSFA formula becomes more punitive as the "p" variable
is raised from 0.5 to 1. The SSFA risk weight, therefore,
increases from 560% to 829%. However, the FRTB
methodology doesn't just stop there. It also includes a
credit spread shock and a residual add-on. The residual
add-on is the easiest of the three to calculate. This is just
1% of the bonds face value. The credit spread shock
calculation involves more steps.
The credit spread shock is calculated as the product of
the bond's spread duration (~7.5 years) and a multiplier
in the ruling. The multiplier is dependent on the bond's
current seniority, current credit quality, and sector. A
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Impact on ABS
The cumulative effect on total RWA under FRTB
versus Basel 2.5 is huge. The senior investment grade
part of the capital structure, the highest quality ABS, will
see the biggest increase in capital from the old regime.
Using FORDO 2015-C as an example, class A senior
tranches will see total capital increase by 4.4 to 10.4
times, while subordinate tranches will see increases of
1.3 to 1.9 times. Within the seniors, tranches with more
spread duration will require more capital under the
sensitivity approach. Furthermore, only ABS that
detaches at 100% is considered senior under the FRTB
proposed rules (we assumed all class A bonds to be
senior for our estimates).
While capital on subordinates is increasing by smaller
multiples, on an absolute basis, the new capital charges
represent big numbers. The proposed FRTB capital as a
percentage of market value for FORDO 15-C C is 154%
versus 117% currently. In other words, more than dollarfor-dollar capital charge will be required for a large bank
to hold FORDO 15-C C on its trading books. The
proposed required FRTB capital will be 236% of market
value for NAVSL15-3 B, a bond that is backed by
FFELP student loans guaranteed by the US government.
AC
Impact on CMBS
The FRTB proposal dramatically increases the
potential capital requirement for new issue conduit
bonds even if they have no delinquent loans. For
JPMBB 2015-C31, the capital requirement as a
percentage of market value jumps to 82% for super
seniors, 191% for AS, 202% to 274% for the IG-rated
subs, and 416% for the below investment grade
subordinate classes. In other words, for many tranches
dealers would need to hold far more capital than the
actual market value of the security. The culprit for the
dramatic spike in capital requirements is clear: the credit
spread shock component is by far the largest contributor
to the total capital requirement, constituting 68% to 97%
of total required capital for the tranches in this example.
The onerous credit spread shock multipliers for
CMBS leads to this outcome. The total capital
requirements are similar for fixed-rate, longer duration
single asset/borrower deals while total capital
requirements are mitigated for floating single
asset/borrower deals, simply by the virtue of their lower
spread durations (approximately 5 years at maximum
extension for most deals). We note that these examples
only illustrate potential capital charges under FRTB at
the bond level and do not take into consideration offsets
to capital arising from any correlation benefits.
While the long implementation timeline will mean that
legacy CMBS bonds will largely have matured at that
point, we think it is instructive to calculate potential
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AC
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AC
SSFA
FRTB
ROE under 6x
Turnover
FRTB
Jumbo 2.0
JPMMT 2015-4 1A9
0.13%
32
2.8%
JPMMT 2015-4 B1
0.25%
35
101
0.9%
JPMMT 2015-4 B2
0.50%
38
63
1.4%
JPMMT 2015-4 B3
0.50%
39
64
1.4%
JPMMT 2015-4 B4
0.50%
39
96
0.9%
JPMMT 2015-4 B5
0.50%
39
121
0.7%
STACR 2015-DNA2 M1
0.07%
281
265
0.3%
STACR 2015-DNA2 M2
0.10%
197
322
0.3%
STACR 2015-DNA2 M3
0.10%
197
456
0.2%
STACR 2015-DNA2 B
0.10%
197
554
0.2%
IHSFR 2015-SFR3 A
0.10%
306
0.3%
IHSFR 2015-SFR3 B
0.15%
199
0.5%
IHSFR 2015-SFR3 C
0.15%
199
0.5%
IHSFR 2015-SFR3 D
0.15%
195
0.5%
IHSFR 2015-SFR3 E
0.15%
190
0.5%
IHSFR 2015-SFR3 F
Source: J.P. Morgan
0.15%
69
211
0.4%
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Appendix
ABS
Basel 2.5
FRTB
FRTB RWA
CE%
Risk Weight
Capital as %
of MV
SSFA
FORDO 15-C A1
12.3%
20%
2.1%
12.3%
20%
2.1%
12.3%
20%
FORDO 15-C A3
12.3%
FORDO 15-C A4
12.3%
FORDO 15-C B
9.4%
629%
66.1%
882%
276%
13%
1171%
123%
FORDO 15-C C
7.4%
1117%
117.3%
1180%
275%
13%
1468%
154%
SDART 2015-5 A1
50.3%
20%
2.1%
15%
19%
13%
47%
5%
50.3%
20%
2.1%
15%
106%
13%
133%
14%
Total RWA
Capital as %
of MV
Credit Sprd
Residual
67%
9%
13%
88%
9%
67%
40%
13%
119%
12%
2.1%
67%
40%
13%
119%
12%
20%
2.1%
67%
90%
12%
169%
18%
20%
2.1%
67%
129%
12%
208%
22%
Auto
50.3%
20%
2.1%
15%
107%
13%
135%
14%
SDART 2015-5 A3
50.3%
20%
2.1%
15%
193%
13%
221%
23%
SDART 2015-5 B
39.4%
20%
2.1%
15%
469%
13%
497%
52%
SDART 2015-5 C
26.2%
20%
2.1%
63%
546%
13%
622%
65%
SDART 2015-5 D
17.0%
52%
5.4%
241%
605%
13%
859%
90%
SDART 2015-5 E
12.0%
262%
27.6%
564%
1251%
13%
1827%
192%
18.8%
20%
2.1%
35%
163%
12%
211%
22%
NAVSL 2015-3 A1
4.3%
20%
2.1%
15%
113%
13%
140%
15%
NAVSL 2015-3 A2
4.3%
20%
2.1%
15%
388%
13%
416%
44%
NAVSL 2015-3 B
1.5%
596%
62.5%
811%
1418%
16%
2244%
236%
SMB 2015-B A1
24.0%
20%
2.1%
18%
83%
13%
113%
12%
24.0%
20%
2.1%
18%
262%
12%
292%
31%
24.0%
20%
2.1%
18%
271%
13%
301%
32%
SMB 2015-B A3
24.0%
20%
2.1%
18%
372%
13%
402%
42%
SMB 2015-B B
14.5%
94%
9.9%
325%
798%
14%
1136%
119%
SMB 2015-B C
7.8%
640%
67.2%
869%
845%
14%
1728%
181%
DEFT 2015-1 A1
25.0%
20%
2.1%
17%
53%
13%
83%
9%
DEFT 2015-1 A2
25.0%
20%
2.1%
17%
309%
13%
338%
36%
DEFT 2015-1 A3
25.0%
20%
2.1%
17%
613%
13%
643%
68%
DEFT 2015-1 B
19.7%
41%
4.3%
223%
756%
13%
991%
104%
DEFT 2015-1 C
11.2%
247%
26.0%
533%
860%
13%
1405%
148%
DEFT 2015-1 D
7.2%
963%
101.2%
1089%
1006%
13%
2108%
221%
Cards
CHAIT 2015-A7 A7
Student Loans
Other
Note: Based on our understanding of currently proposed FRTB rules. The calculation is simplified for illustration purposes (e.g., excluded other sensitivity factors and
variables).
Source: J.P. Morgan
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CMBS
FRTB
Basel 2.5
CMBS
Type
Current
Quality
Senior IG
New Issue
Conduit
CMBS
Non-Senior IG
HY
Legacy
Conduit
(DLQ
Pipeline
Flushed)
Senior IG
HY
Senior IG
Legacy
Conduit
(Full DLQ)
HY
Senior IG
Fixed
SASB
Floating
SASB
Non-Senior IG
FRTB RWA
Total
Capital as
Deal / Tranche
C/E %
RWA
Capital as
% of MV
SSFA
Spread
Credit
Resid.
RWA
% of MV
JPMBB 2015-C31 A1
30.0%
20%
2.1%
15%
272%
12%
299%
31%
JPMBB 2015-C31 A2
30.0%
20%
2.1%
15%
459%
12%
486%
51%
JPMBB 2015-C31 A3
30.0%
20%
2.1%
15%
857%
12%
884%
93%
30.0%
20%
2.1%
15%
666%
12%
693%
73%
JPMBB 2015-C31 AS
24.8%
20%
2.1%
112%
1695%
12%
1820%
191%
JPMBB 2015-C31 B
16.5%
63%
6.6%
269%
1640%
12%
1921%
202%
JPMBB 2015-C31 C
11.9%
280%
29.4%
583%
1610%
13%
2207%
232%
JPMBB 2015-C31 D
7.8%
825%
86.6%
1005%
1588%
16%
2609%
274%
JPMBB 2015-C31 E
5.1%
1250%
131.3%
1250%
2686%
26%
3962%
416%
JPMBB 2015-C31 F
3.5%
1250%
131.3%
1250%
2686%
26%
3962%
416%
JPMBB 2015-C31 NR
0.0%
1250%
131.3%
1250%
2686%
26%
3962%
416%
GSMS 2007-GG10 A4
27.6%
20%
2.1%
17%
141%
12%
170%
18%
27.6%
20%
2.1%
17%
154%
12%
183%
19%
GSMS 2007-GG10 AM
12.5%
145%
15.2%
382%
638%
13%
1032%
108%
GSMS 2007-GG10 AJ
2.1%
1097%
115.2%
1163%
629%
22%
1814%
190%
GSMS 2007-GG10 B
0.6%
1250%
131.3%
1250%
1131%
83%
2464%
259%
GSMS 2007-GG10 C
0.0%
1250%
131.3%
1250%
1131%
224%
2605%
274%
MLCFC 2007-5 A4
30.9%
73%
7.6%
226%
114%
12%
352%
37%
30.9%
73%
7.6%
226%
114%
13%
352%
37%
30.9%
73%
7.6%
226%
113%
12%
351%
37%
MLCFC 2007-5 AM
17.4%
920%
96.6%
1060%
502%
12%
1573%
165%
17.4%
920%
96.6%
1060%
514%
13%
1587%
167%
MLCFC 2007-5 AJ
5.6%
1250%
131.3%
1250%
489%
13%
1752%
184%
5.6%
1250%
131.3%
1250%
506%
13%
1769%
186%
MLCFC 2007-5 B
3.2%
1250%
131.3%
1250%
404%
28%
1682%
177%
MLCFC 2007-5 C
2.2%
1250%
131.3%
1250%
323%
52%
1625%
171%
MLCFC 2007-5 D
0.0%
1250%
131.3%
1250%
289%
132%
1671%
175%
42.8%
20%
2.1%
15%
848%
13%
876%
92%
42.8%
20%
2.1%
15%
849%
13%
877%
92%
HGMT 2015-HGLR B
30.1%
20%
2.1%
40%
1685%
13%
1738%
182%
HGMT 2015-HGLR C
22.9%
20%
2.1%
128%
1660%
13%
1801%
189%
HGMT 2015-HGLR D
8.1%
323%
33.9%
564%
1621%
13%
2198%
231%
463%
HY
HGMT 2015-HGLR E
0.0%
1250%
131.2%
1250%
3145%
13%
4408%
Senior IG
GSCR 2015-HULA A
56.3%
20%
2.1%
15%
489%
12%
516%
54%
GSCR 2015-HULA B
47.7%
20%
2.1%
15%
961%
12%
988%
104%
GSCR 2015-HULA C
41.3%
20%
2.1%
15%
948%
12%
975%
102%
GSCR 2015-HULA D
31.7%
20%
2.1%
38%
920%
13%
970%
102%
GSCR 2015-HULA E
17.0%
35%
3.7%
186%
1806%
13%
2005%
210%
2762%
290%
Non-Senior IG
HY
GSCR 2015-HULA F
0.0%
851%
89.4%
985%
1764%
13%
Note: Assumes total required capital of 10.5%, including the baseline minimum requirement of 8% and the 2.5% countercyclical buffer
Source: J.P. Morgan, PricingDirect, Bloomberg, Basel Committee on Banking Supervision
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Non-agency RMBS
Basel III
FRTB
FRTB RWA
CE%
Risk
Weight
Capital
as % of MV
SSFA
Credit
Sprd
Residual
Total RWA
Capital
as % of MV
15.0%
20%
2.1%
15%
225%
12%
252%
26%
JPMMT 2015-4 B1
4.6%
560%
58.8%
829%
764%
12%
1605%
169%
JPMMT 2015-4 B2
2.9%
1199%
125.9%
1223%
759%
13%
1995%
209%
JPMMT 2015-4 B3
1.8%
1250%
131.3%
1250%
753%
13%
2016%
212%
JPMMT 2015-4 B4
0.8%
1250%
131.3%
1250%
1774%
18%
3042%
319%
JPMMT 2015-4 B5
0.0%
1250%
131.3%
1250%
2578%
22%
3850%
404%
STACR 2015-DNA2 M1
4.9%
1250%
131.3%
976%
187%
13%
1176%
123%
STACR 2015-DNA2 M2
2.7%
1250%
131.3%
1231%
803%
13%
2047%
215%
STACR 2015-DNA2 M3
1.0%
1250%
131.3%
1250%
1632%
13%
2895%
304%
STACR 2015-DNA2 B
0.0%
1250%
131.3%
1250%
2257%
13%
3520%
370%
IHSFR 2015-SFR3 A
55.0%
20%
2.1%
15%
1913%
13%
1940%
204%
IHSFR 2015-SFR3 B
44.9%
20%
2.1%
15%
1870%
13%
1898%
199%
IHSFR 2015-SFR3 C
36.7%
20%
2.1%
15%
1870%
13%
1898%
199%
IHSFR 2015-SFR3 D
29.1%
20%
2.1%
15%
1828%
13%
1855%
195%
IHSFR 2015-SFR3 E
17.7%
37%
3.9%
15%
1785%
13%
1813%
190%
IHSFR 2015-SFR3 F
5.0%
653%
68.6%
293%
1700%
13%
2006%
211%
Jumbo 2.0
Basel III capital does not include market risk capital that is currently sourced from firmwide VAR models;
Capital under FRTB does not include other market shocks (i.e. equity, FX, commodity, etc.) as these are not material relative to the credit spread shock;
RWA shown as a % of Market Value;
Source: J.P. Morgan, PricingDirect, Bloomberg, Basel Committee on Banking Supervision
AC
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Disclosures
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