Risk retention rule

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The risk retention rule requires that those who sponsor of an asset-backed securitisation to “retain an economic interest in a portion of the credit risk for any asset that the securitizer, through the issuance of an asset-backed security, transfers, sells, or conveys to a third party”.

The key question is whether the ABS is collateralised by any type of “self-liquidating financial asset (including a loan, a lease, a mortgage, or a secured or unsecured receivable)” for which payments “depend primarily on cash flow from the asset”.

Self-liquidating financial asset

A “self-liquidating financial asset” is generally viewed as one that is capable, pursuant to its terms, of generating sufficient income by way of distributions and payment at maturity to return the ABS investment.

Transfer

To be in scope for risk-retention, the sponsor needs to be offloading the assets in the first place. If it just originates them in the market (as is the case for certain CLO structures, for example) the requirement for there to be a “transfer” is not met. On February 9, 2018, the Circuit Court, reversing an earlier ruling, ruled that collateral managers in “open-market” CLO transactions are not subject to the risk retention rule or any related regulations.

See also

• Cornell legislation resource