A Repack Note is an untranched note issued by an SPE which passes-through the cash-flows of a single asset or a portfolio of assets held  by the SPE.

Possible examples could be (among multiple others):

1. The repackaging of a single loan in note format,
2. The repackaging of a bond and a swap (cross-currency or interest-rate swap) into a note with desired currency or interest rate profile,
3. The repackaging of a portfolio of mortgages into a pass-through note

It is unclear how an institution should calculate the risk weight of an investment in a Repack Note if it does not consolidate the SPE but is able to look through to the underlying assets at all times.

Repack notes are very common and can arise in multiple contexts. From an economic standpoint the investing institutions are exposed to the combined cash-flows of the assets without any transformation, i.e. the investors receive their pro-rata shares of the cash-flows in proportion to their investments in the Notes.

There is no tranching, which would introduce complexity or model risk. If an institution has at all times knowledge of the assets held by the SPE, we would expect it to be able to look through to the underlying assets in order to calculate risk weighted assets.

However the look-through approach of Article 132 CRR does not seem applicable to such investment since the SPE is not managed and is not regulated as per CRR definition of CIU (like UCITS or AIF).

The look-through approach of the securitisation framework does not seem applicable either since the Note would not qualify as a tranche as defined under Article 2 of Regulation (EU) No 2017/2402 (there is no subordination in a single Note issued).

However, under IFRS 9 an investor is required to look-through the investment if the investment has limited recourse provisions (e.g. to the underlying assets such as for instance a the bond plus the asset/cross-currency swap). If the look-through approach is not available, institutions could be faced with capital treatments either with cliff effects or that do not reflect the actual risk of the repackaged assets.

For example:

a)            A bank buying a loan to an EU Sovereign in the secondary market would have 0% RW but if it purchases a repack of the same loan and does not consolidate the SPE, it would have 100% risk weight under the standardised approach for credit risk despite the repack being arguably more liquid (tradeable security),

b)            A bank buying 50.1% of a repack note would look through (assuming it consolidates the vehicle in its regulatory perimeter) while the same institution would not look through if it has 49.9% of the Note,

c)             A bank selling a 35%-risk weighted mortgage portfolio to an SPE which issues a pass-through note to investors with the bank retaining 10% the note as alignment of interest would face 100% risk weight on the retained notes while it would have 35% if it retained the same vertical tranche as part of a securitisation,

d)            A bank buying a risky subordinated loan in the secondary market would have 250% RW (or even 1,250% RW) but if it purchases a repack of the same loan and does not consolidate the SPE for prudential purposes, it would have 150% risk weight under the standardised approach for credit risk (according to CRR Article 128-Items with particular high risk).