The scope of the question below relates to securitisation transactions of trade receivables and potential application of the purchased receivables approach for these transactions.
Common characteristics of these transactions are:
- The pool of exposures consists of short-term invoices to corporates (e.g. 1-3 months)
- There are formal triggers in place which stop roll-over of transactions in case of high PDs or losses for the portfolio
- The transaction is rebalanced each reporting period i.e. defaulted assets are excluded from eligible funding base
The application of IRB techniques for trade receivables exposures show different risk profile compared to loans:
- PDs are quite high due to typical late payments of the invoices
- LGDs are very low due to very high cure rates i.e. the invoices are typically paid back within few months of hitting default trigger
These type of exposures are payable between 2 corporates and should not be treated on par with bank’s exposures, as the origination and monitoring rules which are applied to them are done outside of the normal lending process of the bank.
The bank is only exposed to short-term risk of the current pool which is financed by the institution. If losses start to occur the institution will stop roll-over and suffer default losses on a short time horizon corresponding to maturity of invoices and their default definition. The scenario where the institution suffers extreme losses for the full year is not possible in practice.
Given the above context we wanted to clarify a few points:
- Should default definition rules under the CRR still apply for such exposures. For example, is it necessary to apply 90dpd trigger or the default definition can be less strict?
- Should estimated PDs be annualised in some way to match overall defaulted amounts from rolling pool on a time horizon of one year? Or is it appropriate to use PD estimates only for the current pool of exposures which would have shorter-term horizon than one year?
Should any PD / LGD floors be applied for these type of transactions?