On February 15 2011, the Bank of Portugal (BoP), the Portuguese central bank, issued Instruction 2/2011 which updated the 2007 Instruction 13/2007 on securitisation. This new Instruction creates new rules for the recognition of transfer of credit risk concerning the positions which are the object of securitisation operations.
One of the main amendments is the introduction of new conditions which must be met by the originator for the purpose of considering that a significant portion of the credit risk has been transferred. For that effect, there is a new definition of tranches with intermediate and high degree of subordination in each transaction.
Another novelty is the fact that the BoP can authorise, at its own discretion, the recognition that a significant credit risk has been transferred even if the necessary conditions (referred above) are not met. However, for such authorisation to be granted it is necessary that there are assurances by the originator that the reduction of its own funds, which shall be obtained by the securitisation operation, is justified by an equivalent transfer of credit risk to third parties.
On the same date, the BoP issued Instruction 3/2011 on external rating agencies and its recognition by the BoP. The Instruction contains the details of the procedure that must be complied with by the external rating agencies wishing to be recognised by the BoP.
Lastly, through Instruction 4/2011, the BoP enacted a new legal framework for the conducting of stress tests which aims to secure a more effective risk management by financial institutions and follows the Basel Committee on Banking Supervision and the Committee of European Banking Supervisors guidelines on the subject.
The Instruction introduces the mandatory reverse stress tests as well as, among other factors, the conducting of the tests based on historical scenarios which must also consider future evolution perspectives, in order to ensure its prospective nature. The Instruction became effective on March 15 2011.
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