Wells Fargo 2013 Annual Report Download - page 96

Risk Management – Asset/Liability Management (continued)
Securitization Positions Basel 2.5 imposes a separate market
risk capital charge for positions classified as a securitization or
re-securitization. The primary criteria for classification as a
securitization is whether there is a transfer of risk and whether
the credit risk associated with the underlying exposures has been
separated into at least two tranches reflecting different levels of
seniority. Covered trading securitizations positions under Basel
2.5 include ABS, commercial mortgage-backed securities
(CMBS), residential mortgage-backed securities (RMBS), and
collateralized loan and other debt obligations (CLO/CDO)
positions. The securitization capital requirements are the greater
of the capital requirements of the net long or short exposure, and
are capped at the maximum loss that could be incurred on any
given transaction. Table 50 shows the aggregate net fair market
value of securities and derivative securitization positions by
exposure type that meet the regulatory definition of a covered
trading securitization position at December 31, 2013.
Table 50: Covered Securitization Positions by Exposure Type
(Market Value)
December 31, 2013
(in millions) ABS CMBS RMBS CLO/CDO
Securitization Exposure
Securities $ 604 559 479 561
Derivatives (2) 2 16 (72)
Total $ 602 561 495 489
Securitization Due Diligence and Risk Monitoring The market
risk capital rule requires that for every covered trading
securitization and re-securitization position, the Company
conducts due diligence on the risk of each position within three
days of the execution of the purchase of that position. The
Company’s due diligence provides an understanding of the
features that would materially affect the performance of a
securitization or re-securitization. The due diligence procedures
are again performed on a quarterly basis for each securitization
and re-securitization position. The Company attempts to manage
the risks associated with securitization and re-securitization
positions through the use of offsetting positions and portfolio
diversification. The Company has implemented an automated
solution intended to track the due diligence associated with
every transaction and position.
Comprehensive Risk Charge / Correlation Trading The market
risk capital rule requires capital for correlation trading positions.
The net market value of correlation trading positions that meet
the definition of a covered position at December 31, 2013 was a
net loss of less than $1 million, all of which were long positions.
Correlation trading is a discontinued business in which the
Company is no longer active, with current positions hedged and
maturing over time. Given the immaterial aspect of this
discontinued activity, the Company has elected not to develop an
internal model based approach but will utilize standard specific
risk charges for these positions.
Other Specific Risk For positions that are not evaluated by the
approved internal specific risk models, a regulatory prescribed
standard specific risk charge is applied. The standard specific
risk add-on for sovereign entities, public sector entities and
depository institutions is based on the Organization for
Economic Co-operation and Development (OECD) country risk
classifications (CRC) and the remaining contractual maturity of
the position. These risk add-ons for debt positions ranges from
0.25% to 12%. The add-on for corporate debt is based on credit
spreads and the remaining contractual maturity of the position.
All other types of debt positions are subject to an 8% add-on.
The standard specific risk add-on for equity positions is
generally 8%.
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