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Risk retention rule: Difference between revisions
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{{a|repack|{{us disclaimer small}} }}{{quote| | {{a|repack|{{us disclaimer small}} }}{{quote| | ||
'''Base risk retention requirement'''. Except as otherwise provided in this part, the sponsor of a securitization transaction [...] shall retain an economic interest in the [[credit risk]] of the securitized assets in accordance with any one of §§ 246.4 through 246.10. Credit risk in securitized assets required to be retained and held by any person for purposes of compliance with this part, whether a sponsor, an originator, an originator-seller, or a third-party purchaser, except as otherwise provided in this part, may be acquired and held by any of such person's majority-owned affiliates (other than an issuing entity).<ref>[https://www.law.cornell.edu/cfr/text/17/part-246/subpart-B Cornell legislation resource].</ref>}} | '''Base risk retention requirement'''. Except as otherwise provided in this part, the sponsor of a securitization transaction [...] shall retain an economic interest in the [[credit risk]] of the securitized assets in accordance with any one of §§ 246.4 through 246.10. Credit risk in securitized assets required to be retained and held by any person for purposes of compliance with this part, whether a sponsor, an originator, an originator-seller, or a third-party purchaser, except as otherwise provided in this part, may be acquired and held by any of such person's majority-owned affiliates (other than an issuing entity).<ref>[https://www.law.cornell.edu/cfr/text/17/part-246/subpart-B Cornell legislation resource].</ref> | ||
Asset means a [[self-liquidating financial asset]] (including but not limited to a [[loan]], [[lease]], [[mortgage]], or [[receivable]])}} | |||
The risk retention rule requires that those who sponsor an [[asset-backed security]] 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 risk retention rule requires that those who sponsor an [[asset-backed security]] 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”. | ||
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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”. | 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=== | ===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 | 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 its original cost. This would cover things like (non-perpetual) bonds, loans, mortgages and receivables but we think<ref>[[disclaimer]]</ref> not [[commodities]], [[Emission allowances|emission allowances]] or [[equities]] none of which necessarily generate any intrinsic cashflow of their own (okay, equities might pay dividends, but don’t have to, and certainly don’t pay down their whole capital value. | ||
===Transfer=== | ===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<ref>See [https://www.lsta.org/news-resources/clo-risk-retention-ruling-analysis-from-the-trenches/ press release].</ref> that collateral managers in “open-market” CLO transactions are not subject to the risk retention rule or any related regulations. | 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<ref>See [https://www.lsta.org/news-resources/clo-risk-retention-ruling-analysis-from-the-trenches/ press release].</ref> that collateral managers in “open-market” CLO transactions are not subject to the risk retention rule or any related regulations. | ||