Article 160(4) states that:  "For dilution risk, in addition to the protection providers referred to in Article 201(1)(g) the seller of the purchased receivables is eligible if the following conditions are met:

...

b) the corporate entity, in the case of institutions calculating risk-weighted exposure amounts and expected loss amounts under the IRB Approach, does not have a credit assessment by a recognised ECAI and is internally rated as having a PD equivalent to that associated with the credit assessments of ECAIs determined by EBA to be associated with credit quality step 3 or above under the rules for the risk weighting of exposures to corporates under Chapter 2."

The wording indicates that the scope of protection providers specified in 201(1)(g) is expanded by sellers with ratings equivalent to CQS3 or better. However, all rated corporate counter-parties (independent of their ratings) are already eligible protection providers. How should this be interpreted? e.g.

– Article 160(4) overrides the article 201(1)(g) and limits the scope of eligible protection providers for dilution risk to only those which are rated CQS3 or better

– Article 160(4) doesn’t impose additional restrictions to 201(1)(g) and all sellers which are rated corporates are eligible protection providers for dilution risk

Possibility to use substitution framework for dilution risk has very material impact on capital requirements for trade receivables securitisations. For example, Risk Weights for transactions with or without the use of substitution framework for dilution may differ up to 10-20 times under SEC-IRBA approach. As a result, the capital requirements without the use of substitution framework are not commensurate with risk levels which are thought to be relevant for these type of transactions. .

At the same time the criteria for use of substitution framework for dilution risk are not fully clear and they seem to be conflicting with original Basel text:

• Original Basel II framework specifies that:

– The same substitution rules apply both for default and dilution risk (Basel 2 - article 373)

– Under Foundation IRB approach the scope of eligible protection providers includes guarantors eligible under the standardised approach and companies that are internally rated and associated with a PD equivalent to A- or better (Basel 2 – article 302)

– Under Advanced IRB approach the scope of eligible protection providers is not restricted by their ratings (Basel 2 – article 307)

• CRR specifies similar rules for the use of substitution framework, however the wording of some articles is not fully clear:

– The general scope of eligible protection providers includes all internally rated corporates (CRR Art. 201(g))

– For dilution risk, in addition to the protection providers referred to in Article 201(1)(g) the seller of the purchased receivables is eligible if it is internally rated with PD equivalent to Credit Quality Step 3 or above and other criteria are met (CRR Art. 160(4))

• The wording in CRR article 160(4) is unclear as the sellers of purchased receivables are rated corporates which are already covered by article 201(1)(g). Therefore the wording “in addition to the protection providers referred to in Article 201(1)(g)” appears to be conflicting and illogical