December 2014
U.S. Regulators Adopt Final Risk Retention Rule
for Securitizations
Key Takeaways
Contents
Background....................... 2
>
The Final Rule follows the broad outlines and reasoning behind NPR2, but
leaves many issues unaddressed
The Final Rule .................. 3
>
As in NPR 2, a sponsor may retain risk in any combination of eligible
vertical and horizontal ABS interests, so long as they together total no less
than 5% of the transaction’s ABS interests, subject to restrictions on
transfer and hedging
Non-standard Risk
Retention .......................... 4
Standard Risk Retention
Approach .......................... 3
Multiple Sponsors and Risk
Retention by One or More
Third Parties ..................... 4
>
Restrictions on transfer and hedging are subject to sunset provisions
>
Vertical risk retention is measured with respect to an identical exposure to
each class of ABS interests issued while horizontal risk retention is
measured as the ratio of the fair value of the eligible horizontal residual
interest retained to the fair value of all ABS interests issued in the
transaction
Special Products Excluded4
>
In a change from NPR 2, only the 5% eligible horizontal residual interest
option risk retention requirement is measured against fair value
(determined under U.S. GAAP), while the 5% vertical interest option is now
only measured as a percentage of face value or cash flows of each class
of ABS interests
The Roadmap ................... 5
>
Special risk retention mechanisms (many of which are practically
unusable) are available to certain market participants for certain product
types, including, among others, open market CLO transactions, revolving
pool securitizations, ABCP conduits and CMBS
>
Certain products meeting certain underwriting criteria are exempt from the
RRRs
>
These RRRs apply to all securitization transactions (whether registered
with the SEC or not) and will become effective two years from the
publication date of the final rules for all asset classes other than RMBS in
U.S. Regulators Adopt Final Risk Retention Rule for Securitizations
Restrictions on Hedging
and Transfer ..................... 4
Exemptions and safe
harbors.............................. 5
1
respect of which they will become effective one year from the publication
date of the final rules
>
A sponsor may share the retained risk with originators subject to certain
conditions, and if there are multiple sponsors, each of them is responsible
for ensuring that at least one of them satisfies the RRRs
>
There is an exemption for foreign securitizations by foreign sponsors and
foreign issuers for issuances with minimal relationship to the U.S. and that
have no more than 10% of the dollar value of all classes of ABS interests
held by or for the benefit of U.S. persons
Background
The Relevant Regulators1 recently adopted for publication in the Federal Register
a final rule (the “Final Rule”) in respect of risk retention under Section 15G of the
Securities Exchange Act of 1934 (as amended, the “34 Act”), as added by
Section 941 of the Dodd-Frank Wall Street Reform and Consumer Protection Act
(the “DFA”).2 Section 15G requires the securitizer of a securitization to retain 5%
of the credit risk of the assets being securitized, but defers to the Relevant
Regulators to fill in the majority of details necessary for implementation. A first
notice of proposed rulemaking was published in the Federal Register on April 29,
2011 (“NPR 1”)3 and a second notice of proposed rulemaking was published in
the Federal Register on September 20, 2013 (“NPR 2”).4
Section 15G was added to the 34 Act in an attempt to address the perceived
problems of the so-called “originate to distribute” model by requiring securitizers5
to retain risk or “skin in the game” in the assets they securitize. In some cases,
the statute directs rulemaking specifically to address certain items, e.g., carveouts for various asset types satisfying underwriting criteria to be established.
Although more than a year elapsed between publication of NPR 2 and adoption
of the Final Rule, the Final Rule largely follows NPR 2 with only a few
modifications.
While commentators largely found the NPR2 more flexible and better adapted to
the securitization markets than NPR 1, hundreds of suggestions for further
improvement were evaluated and mostly rejected by the Relevant Regulators.
1
2
3
4
5
The Final Rule was, as required by the DFA, adopted by, as applicable, Office of the Comptroller of
the Currency, Treasury; Board of Governors of the Federal Reserve System; Federal Deposit
Insurance Corporation; U.S. Securities and Exchange Commission; Federal Housing Finance
Agency; and Department of Housing and Urban Development (collectively, the “Relevant
Regulators”).
Public
Law
111–203,
124
Stat.
1376
(2010)
available
at
http://cftc.gov/LawRegulation/DoddFrankAct/hr4173_enrolledbill.
Credit Risk Retention; Proposed Rule, 76 FR 24090 (April 29, 2011) available at
https://www.federalregister.gov/articles/2011/04/29/2011-8364/credit-risk-retention.
Credit Risk Retention; Proposed Rule, 76 FR 24090 (September 20, 2013) available at
https://www.federalregister.gov/articles/2013/09/20/2013-21677/credit-risk-retention.
“Securitizer” and “sponsor” are used interchangeably in this note. The Final Rule provides detail on
the reasoning that lead the Relevant Regulators to adopt the term the market has adopted,
‘sponsor” notwithstanding the statutory term “securitizer.”
U.S. Regulators Adopt Final Risk Retention Rule for Securitizations
2
For example, a complete carve-out for collateralized loan obligations (“CLOs”)
was not adopted. As such, managers of CLOs not within the narrow and
unrealistic exception that was included will be treated as securitizers and will
need to consider if and how they satisfy the 5% risk retention requirement.6
Unfortunately, the potential to satisfy the requirements by direct investment in the
assets of a securitization rather than the securities itself was not re-instated and
proposals for a broad third-party retention option were rejected.
Although the Relevant Regulators made certain minor concessions to market
practice, such as the elimination of the cash flow prohibition on the eligible
horizontal residual interest option,7 and certain improvements in the name of
credit access were added, the Final Rule is nonetheless likely to negatively
impact the U.S. securitization markets, and be especially problematic for CLOs,
while concentrating securitization activity in exempted asset classes such as
QRMs or simply further diminishing the size of the U.S. securitization markets.
The Final Rule applies to all securitization transactions (as discussed in more
detail below) and, by virtue of that fact and various other features of the proposed
rules, it raises a host of unique issues for foreign securitizations, which we
address in Sections 8 and 10 below.
The Final Rule
Similar to NPR 2, the Final Rule breaks down into (i) standard risk retention, (ii)
non-standard risk retention, (iii) special products, (iv) hedging and transfer
restrictions and (v) general exemptions and safe harbors. We describe each of
these briefly below and then address them in more granularity in the sections that
follow.8
Standard Risk Retention Approach
The Final Rule articulates a standard approach to satisfying the RRRs, which
involves the sponsor holding a 5% (calculated based upon U.S. GAAP fair value)
eligible horizontal (i.e., a first loss position), or vertical (i.e., a pari passu or
vertical interest in each class of the issuer’s securities) interest or any
6
7
8
Following the release of the RRRs, the Loan Syndications and Trading Association filed a lawsuit
over the RRRs alleging that the Final Rule is “arbitrary, capricious, an abuse of discretion, or
otherwise not in accordance with law.” The case is The Loan Syndications & Trading Association v.
SEC, 14-1240, U.S. Court of Appeals, District of Columbia Circuit (Washington).
NPR 2 proposed a requirement that a sponsor holding an eligible horizontal residual interest be
subject to certain cash flow restrictions. Such restrictions were designed to limit payments to
holders of an eligible horizontal residual interest, in order to prevent a sponsor from structuring a
transaction so that the holder of the eligible horizontal residual interest could receive
disproportionate payments with respect to its interest. Specifically, sponsors were required to make
a one-time cash flow projection based on fair value and certify to investors that its cash payment
recovery percentages were not projected to be larger than the recovery percentages for all other
ABS interests on any future payment date.
This note does not address every detail of the Final Rule. In some cases we have glossed over or
excluded elements and in others we have changed or deleted words and/or summarized
provisions. We have also changed the order in which various items appear. This note is for general
informational purposes and should not be construed as legal advice. Please be sure to consult the
actual text of the Final Rule along with counsel.
U.S. Regulators Adopt Final Risk Retention Rule for Securitizations
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combination of such eligible horizontal and vertical interests. The standard risk
retention approach must be used unless one of the non-standard risk retention
approaches is available or there is another exemption. If both a non-standard
approach and a standard approach are available, then the sponsor may use
either.
Non-standard Risk Retention
In addition to the standard risk retention approach, the Final Rule identifies
various products and asset classes in respect of which the RRRs may be
satisfied in a different fashion and/or by a different person retaining some or all of
the relevant risk. The most relevant of these include: (i) open market CLOs; (ii)
revolving pool securitizations; (iii) CMBS; and (iv) eligible ABCP conduits. The
non-standard approaches available for these asset classes require satisfying a
variety of conditions, including specific structural features and additional
disclosure requirements (beyond those applicable to the standard risk retention
approach).
Multiple Sponsors and Risk Retention by One or More Third
Parties
For securitizations involving multiple sponsors, the Final Rule does not allow risk
retention to be apportioned among the sponsors. Instead, each sponsor must
ensure that at least one sponsor satisfies the RRRs at all times. The Final Rule
provides in certain limited instances that a sponsor may allow another person to
retain the required amount of credit risk. As described in more detail below,
potential third-party holders of the credit risk include originators, third-party
purchasers in CMBS transactions and originator-sellers in ABCP conduit
securitizations. However, even when another person is permitted to retain risk,
the sponsor still remains responsible under the Final Rule for compliance with the
RRRs.
Special Products Excluded
In respect of securitizations where the collateral comprises certain special
products meeting certain minimum underwriting criteria, the Final Rule provides
that the RRRs will not apply, reasoning that such high quality assets eliminate the
need for “skin in the game.”9 The exempt securitizations are summarized in
Section 7 below.
Restrictions on Hedging and Transfer
In addition to the general restrictions on hedging and transfer, which we discuss
below, certain products have specific additional or different restrictions. The
9
Blended pools of the same category (but not different categories) of these special products where
some meet the underwriting criteria and others do not may have the RRRs reduced on a blended
basis.
U.S. Regulators Adopt Final Risk Retention Rule for Securitizations
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restrictions on hedging and transfer end or “sunset” after certain periods of time
expire. Once these restrictions cease to apply, hedging and transfer are
permitted.
Exemptions and Safe Harbors
In addition to the other exemptions listed in Section 7 below, there are also
narrow safe harbors for foreign securitizations10 and for resecuritizations.
The Roadmap
1
Timing
The RRRs will become effective for RMBS one year from the date the
final rules are published in the Federal Register and two years from the
date the final rules are published in the Federal Register for all other
asset classes.
2
Scope
The RRRs apply to all securitization transactions11 (whether registered
with the U.S. Securities and Exchange Commission (the “SEC”) or not)
with limited exemptions based upon, among other things, asset type and
quality (discussed in more detail below), and whether a limited nexus to
the U.S. would make it eligible for the foreign securitization exemption.
3
Standard risk retention12
3.1
The sponsor, or a majority-owned affiliate, of a securitization transaction
must retain on the closing date: (i) an eligible vertical interest of at least
5% of each class of ABS interests; (ii) an eligible horizontal residual
interest of at least 5% of the fair value (determined under U.S. GAAP as
of the pricing date) of the first-loss tranche; or (iii) any combination
thereof so long as the sum of the percentage of the eligible vertical
interest and the percentage of the fair value of the eligible horizontal
residual interest is no less than 5%.13 The sponsor may not transfer or
hedge the retained risk prior to certain sunset dates, discussed in Section
5 below.
3.2
For sponsors electing to satisfy the requirements through a combined
approach, the sum of the two vertical and horizontal percentages must at
10
11
12
13
See infra Section 8.
Transactions which do not involve the issuance of asset-backed securities (as defined below) are
not securitization transactions (as defined below) and are thus not within the scope of Section 15G.
See infra note 15. Various other exemptions are discussed below including for foreign
securitizations and pass-through resecuritizations.
Final Rule §___.4.
5% measured as of the closing date of the face value of the ABS interests or, if the ABS interests
have no face value, 5% of the cash flows paid to such class of ABS interests. See Final Rule at 56.
A portion of the 5% may also be held as an eligible horizontal cash reserve account, see id. at
§___.4(b).
U.S. Regulators Adopt Final Risk Retention Rule for Securitizations
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least equal 5%. Thus, if a sponsor holds an eligible horizontal residual
interest of 3.25% of the fair value of all the ABS interests in the issuing
entity, the sponsor must also hold (at a minimum) a vertical interest of
1.75% of the cash flows paid on each class of ABS interests in the
issuing entity. Alternatively, the sponsor may retain a single vertical
security representing 1.75% of the cash flows paid on each class of ABS
interests in the issuing entity (other than the single vertical security itself).
Sponsor = a person who organizes and initiates a
securitization transaction by selling or transferring
assets, either directly or indirectly, including
14
through an affiliate, to the issuing entity
Securitization transaction = a transaction
involving the offer and sale of asset-backed
15
securities by an issuing entity
Securitized assets = an asset (i.e., a selfliquidating financial asset (including but not limited
to a loan, lease, mortgage or receivable))
transferred, sold or conveyed to an issuing entity
that collateralizes the ABS interests issued by that
issuing entity
Issuing entity = the trust or other entity that (1)
owns or holds the pool of assets to be
securitized and (2) in whose name the assetbacked securities are issued
Asset-backed securities (“ABS”) = a fixed-income
or other security collateralized by any type of selfliquidating financial asset (including a loan, a
lease, a mortgage, or a secured or unsecured
receivable) that allows the holder of the security to
receive payments that depend primarily on cash
flow from the asset, including CMOs, CDOs,
CBOs, CDOs of ABS, CDOs of CDOs and
16
anything else the SEC determines by rule
ABS interest = any interest or obligation issued
by an issuing entity, whether or not certificated,
payments on which are primarily dependent on
the cash flows of the collateral owned or held
17 18
by the issuing entity
Eligible vertical interest = with respect to any
Eligible horizontal residual interest = with
14
15
16
17
18
The sponsor may allocate retained risk to one or more originators subject to certain criteria,
including limiting such allocation to the portion of the pool originated by such originator and
requiring that any such originator have originated at least 20% of the pool as well as requiring
advance notice to potential investors of the originator’s identity and form, and the form, amount and
nature of the interest and the method of payment for such interest. The originator must retain its
allocated share in the same manner as would have been required of the sponsor, and subject to
the same restrictions on transferring, hedging, or financing the retained interest. When allocating
retained risk to one or more originators, the sponsor remains responsible for ensuring that the
RRRs are satisfied. If the sponsor determines any originator is not in compliance, the sponsor must
notify the holders of the ABS interests of such noncompliance by the originator. Final Rule §§
___.3(b) and ___.11.
Narrow exemptions for resecuritizations and foreign securitizations exist, but the status of synthetic
securitizations is less clear under the Final Rule than was the case under NPR 1 or NPR 2. NPR 1
stated in a footnote that synthetic securitizations were not captured by the proposed rules because
they did not constitute Exchange Act ABS. NPR 2 similarly included a footnote expressly stating
that synthetic securitizations were not covered by the proposed rules, but dropping the explanation.
The Final Rule contains neither the statement and reasoning from NPR 1 nor the statement from
NPR 2. It is not clear whether this simply reflects a streamlining of the proposal as it was moved
into final form or if its omission was intended to signal something more substantive.
See § 3(a)(79) of the 34 Act.
Non-economic interests in real estate investment conduits (“REMICS”) and tiered REMIC holdings
within the same structure are now excluded from the definition of ABS interest.
Excludes items: (i) issued primarily to evidence ownership of the issuing entity; and (ii) whose
payments are not primarily dependent on the securitized assets’ cash flows. Also excludes service
providers’ rights to receive payments for services.
U.S. Regulators Adopt Final Risk Retention Rule for Securitizations
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securitization transaction, a single vertical
19
security or an interest in each class of ABS
interests in the issuing entity issued as part of the
securitization transaction that constitutes the same
proportion of each such class
3.3
respect to a securitization transaction, an ABS
20
interest in the issuing entity that is a first loss
position (n.b., sponsor may instead fund an
eligible horizontal reserve account with cash in
an amount equal to the eligible horizontal
residual interest, subject to the account
21
satisfying certain conditions)
Disclosure requirements for standard risk retention
3.3.1
Horizontal
Sponsors using the “standard risk retention” approach and
holding an eligible horizontal residual interest must satisfy
certain disclosure requirements by providing to potential
investors within a reasonable period of time prior to the sale of
the ABS in the securitization transaction written disclosures22,
including, among other things:
19
20
21
22
23
(i)
the fair value or range of fair values of the eligible
horizontal residual interest the sponsor expects to retain
at closing;23
(ii)
description of the valuation methodology, including
material inputs and assumptions, used to calculate the
estimated fair value or range of fair values of all classes
of ABS interests, including any portion of the eligible
horizontal residual interest retained by the sponsor;
(iii)
key inputs and assumptions (or a comprehensive
description thereof) for determining fair value that could
have a material impact on the fair value calculation or
would be material to a prospective investor’s ability to
evaluate the sponsor’s fair value calculations; and
The single vertical security option is not substantively different than the eligible vertical interest
option, but rather as a matter of convenience allows the eligible vertical interest to be held in the
form of a single security rather than multiple securities.
That is an interest in a single class or multiple classes in the issuing entity, provided that each
interest meets, individually or in the aggregate, all of the requirements of this definition.
See Final Rule §___.4(b)(1)-(3) for those conditions. While eligible horizontal cash reserve
accounts were available under NPR2, the Final Rule further limited rather than expanded the types
of investments such accounts and similar accounts available to master pool securitizations may
hold, rendering the provision unlikely to be viewed as an attractive alternative.
The Final Rule softens somewhat the disclosure regime proposed under NPR 2 by allowing a
range of fair values based on a range of bona fide estimates or specified prices, sizes and rates of
interests of each class of ABS interests and requiring inputs and methodologies that broadly meet a
“materiality” standard. To the extent asset-level data is used, that data must be reasonably current;
under 60 or 185 days depending on the securitization’s payment date schedule. See Final Rule at
§___.4(c).
If the specific prices, sizes, or rates of interest of each tranche of the securitization are not
available, the sponsor must disclose a range of fair values of the eligible horizontal residual interest
that the sponsor expects to retain at the close of the securitization transaction based on a range of
bona fide estimates or specified prices, sizes, or rates of interest of each tranche of the
securitization.
U.S. Regulators Adopt Final Risk Retention Rule for Securitizations
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(iv)
the reference data set or other historical information
used to develop the key inputs and assumptions.24
As a post-closing matter, sponsors will need to report the fair
value of (x) the eligible horizontal residual interest retained at
closing, based on actual sale prices and finalized tranche sizes
and (y) the eligible horizontal residual interest that the sponsor is
required to retain under the Final Rule. The sponsor must also
describe any material differences in the valuation methodology
including key inputs and assumptions used in calculating the fair
value or range of fair values disclosed prior to sale, and those
used at closing.
If a sponsor utilizes an eligible horizontal cash reserve account,
then, in addition to the above disclosure, the sponsor must also
disclose:
3.3.2
(i)
the amount to be placed (or that is placed) in such
account at closing and the eligible horizontal residual
interest that the sponsor is required to fund to satisfy the
Final Rule’s requirements; and
(ii)
a description of the material terms of the cash reserve
account.
Vertical
Where the sponsor retains an eligible vertical interest, the
required disclosure must include, within a reasonable period of
time prior to the sale of any asset-backed security issued in the
same offering of ABS interests, the following:
(i)
the form of the vertical interest, i.e., whether the sponsor
will retain it in the form of a single vertical security or as a
separate proportional interest in each class of ABS
interests;
(ii)
the percentage that the sponsor is required to retain as a
vertical interest; and
(iii)
a description of the material terms of the vertical interest
and the amount that the sponsor expects to retain.25
Post-closing of the transaction, if the amount of the vertical
interest actually retained is materially different from the amount
24
25
Final Rule §___.4(c)(1). See also Final Rule §___.4(d) (requiring records and certifications required
under § 4(a) and § 4(c) be kept and be provided on request to the SEC and the appropriate Federal
Banking agency, if any, until three years after no ABS interests remain outstanding). Additional
elements apply where the sponsor retains risk through the funding of a horizontal reserve account.
Final Rule §___.4(c)(1)(iii).
See Final Rule §___.4(c) for further details and additional information.
U.S. Regulators Adopt Final Risk Retention Rule for Securitizations
8
described above, then the sponsor will need to make a postclosing disclosure to that effect.
3.3.3
Written records
Sponsors using the standard risk retention method must make
various calculations and certifications to investors and maintain
written records of the same, including with respect to the
disclosure requirements discussed above.26
The non-standard risk retention approaches discussed below require
compliance with additional product/asset type specific disclosure
provisions, as applicable.
4
Non-standard risk retention
Certain participants in some securitizations may avail themselves of
alternative or “non-standard” approaches to risk retention to satisfy the
RRRs, including holding risk in a form other than “ABS interests” – e.g.,
through an investment in the securitized assets themselves, an option
that was rejected for standard risk retention.
4.1
26
Open market CLOs – an exception with limited practical utility
4.1.1
With respect to open market CLO transactions, as more fully
described below, the RRRs may be satisfied if the lead arranger
for each loan purchased by the CLO (rather than the manager,
as sponsor, as would be required under the standard risk
retention approach) retains 5% of the face value of each eligible
loan tranche included in the CLO. The lead arranger is required
to retain this portion of the loan tranche until the repayment,
maturity, involuntary and unscheduled acceleration, payment
default, or bankruptcy default of the loan. This mechanism is
quite narrow in its requirements and applicable conditions, as the
language of the rule and the defined terms below reflect. If this
non-standard approach is not available for a particular CLO, then
the manager of that CLO, as sponsor, will be required to satisfy
the RRRs under the standard risk retention approach.
4.1.2
More specifically, a sponsor satisfies the RRRs with respect to
an open market CLO transaction if:
(i)
the open market CLO (“OCLO”) acquires/holds only
CLO-eligible loan tranches and servicing assets;
(ii)
the OCLO’s governing documents require that, at all
times, its assets consist of senior, secured syndicated
See Final Rule §___.4(c); see also Final Rule §___.4(d) supra note 24.
U.S. Regulators Adopt Final Risk Retention Rule for Securitizations
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Loans that are CLO-eligible loan tranches and servicing
assets;
(iii)
the OCLO does not invest in ABS interests or in credit
derivatives other than hedging transactions that are
servicing assets to hedge risks of the open market CLO;
(iv)
all purchases of CLO-eligible loan tranches and other
assets by the OCLO issuing entity or through a
warehouse facility used to accumulate the loans prior to
the issuance of the CLO’s ABS interests are made in
open market transactions on an arm’s length basis;
(v)
the CLO manager is not entitled to receive any
management fee or gain on sale at the time the open
market CLO issues its ABS interests.
Note that the risk retention component, which is not immediately
apparent from these five numbered items, is embedded in the
definition of “CLO-eligible loan tranche” which is summarized
below. Otherwise, the CLO manager must itself retain the risk to
satisfy the RRRs under the standard risk retention approach.
4.1.3
27
There are also special disclosure requirements with respect to
this option.27
Senior, secured syndicated loan = a
commercial loan that: (1) is not subordinate to
any of borrower’s other borrowed money
obligations; (2) is secured by a valid first priority
security interest or lien in the collateral
underlying the loan; and (3) the value of such
collateral together with the obligor’s other
attributes is adequate (in the commercially
reasonable judgment of the CLO manager
exercised at the time of investment) to repay
the loan and all other indebtedness of equal
seniority secured by such collateral, and the
CLO manager certifies, on or prior to each date
that it acquires a loan constituting part of a new
CLO-eligible tranche, that it has policies and
procedures to evaluate the likelihood of
repayment of loans acquired by the CLO and it
has followed such policies and procedures in
evaluating each CLO-eligible loan tranche.
CLO-eligible loan tranche = a commercial term
loan of a syndicated facility having the following
features: (1) lead arranger having taken an
allocation of a funded portion of the facility
retains at least 5% of tranche’s face amount; (2)
holders of the CLO-eligible loan tranche have
consent rights with respect to any material
waivers and amendments; and (3) the pro rata
provisions, voting provisions, and similar
provisions applicable to the security associated
with such CLO-eligible loan tranches are not
materially less advantageous to the holder(s) of
such CLO-eligible tranche than the terms of
other tranches of comparable seniority in the
broader syndicated credit facility.
open market CLO = a CLO: (1) whose assets
consist of senior, secured syndicated loans
acquired by such CLO directly from the sellers
thereof in open market transactions and of
servicing assets, (2) that is managed by a CLO
Open market transaction = (1) either an initial
loan syndication transaction or a secondary
market transaction in which a seller offers
senior, secured syndicated loans to prospective
purchasers in the loan market on market terms
See Final Rule §___.9(d) for these requirements.
U.S. Regulators Adopt Final Risk Retention Rule for Securitizations
10
manager, and (3) that holds less than 50% of
its assets, by aggregate outstanding
principal amount, in loans syndicated by
lead arrangers that are affiliates of the CLO
or the CLO manager or originated by
originators that are affiliates of the CLO or
the CLO manager.
on an arm’s length basis, which prospective
purchasers include, but are not limited to,
entities that are not affiliated with the seller, or
(2) a reverse inquiry from a prospective
purchaser of a senior, secured syndicated loan
through a dealer in the loan market to purchase
a senior, secured syndicated loan to be sourced
by the dealer in the loan market.
CLO manager = an entity managing a CLO that
is a registered investment adviser under the
Investment Advisers Act of 1940, as amended,
or is an affiliate of such an entity and is itself
managed by such a registered investment
adviser.
Servicing assets = rights or other assets
designed to assure the servicing or timely
distribution of proceeds to ABS interest holders
and rights or other assets that are related or
incidental to purchasing or otherwise acquiring
and holding the issuing entity’s securitized
assets. Includes amounts received by the
issuing entity as proceeds of securitized assets,
including proceeds of rights or other assets,
whether as remittances by obligors or as other
recoveries.
CLO = a special purpose entity that: (1) issues
debt and equity interests, and (2) whose assets
consist primarily of loans that are securitized
assets and servicing assets.
4.2
Revolving pool securitizations28
4.2.1
28
29
30
The Final Rule allows the RRRs to be satisfied for a
securitization where the issuing entity is a revolving pool
securitization if the sponsor (or one or more wholly-owned
affiliates of the sponsor, including one or more depositors)29
maintains a seller’s interest of not less than 5%30 of the
aggregate unpaid principal balance of all outstanding investor
ABS interests in the issuing entity. Note that this is a different
measure than the U.S. GAAP fair value determination under the
standard risk retention approach. In a change from NPR 2, the
Final Rule expanded how the seller’s interest may be measured
to allow such interest to consist of an investment in a specified
minimum percentage of securitized assets in the pool, including
in any extra securitized assets added to the pool, instead of an
interest in the ABS interests. The Relevant Regulators noted this
Final Rule §___.5. In NPR2, these were defined as “revolving master trusts”. The change reflects
only the intention to capture securitization structures that are substantially within this otherwise
unchanged definition but which are organized as a different type of legal entity.
Final Rule §___.5(e)(1).
RRRs under this provision must be satisfied both at the closing of each issuance of ABS interests
and at least monthly thereafter at a seller’s interest measurement date specified under the
securitization transaction documents until no ABS interest in the issuing entity is held by any
person not a wholly-owned affiliate of the sponsor; provided that if on any monthly measurement
date a revolving pool securitization fails to meet the 5% test and the securitization transaction
documents specify a cure period, the 5% test must be satisfied within the earlier of the cure period,
or one month after the monthly measurement date. Final Rule §___.5(c)(4).
U.S. Regulators Adopt Final Risk Retention Rule for Securitizations
11
change was intended to accommodate certain revolving pool
securitizations in which the sponsor is obligated to maintain an
undivided interest in the securitized assets in the collateral pool,
in an amount equal to a specified percentage of the trust's
outstanding investor ABS interests. The sponsor in this structure
is also required under the transaction documents to maintain the
specified minimum percentage amount of securitized assets in
the pool if the securitization is to continue revolving, through the
ongoing addition of extra securitized assets to the pool.
4.2.2
There are special provisions for multi-level revolving pool
securitizations,31 credit for pool level excess funding accounts,32
combined retention at the issuing entity and series level33 as well
as in respect of early amortization.34
Revolving pool securitization = an issuing entity
that is established to issue on multiple issuance
dates more than one series, class, subclass or
tranche of ABS that are collateralized by a
common pool of securitized assets that will
change in composition over time, and that does
not monetize excess interest and fees from its
securitized assets.
31
32
33
34
Seller’s interest = an ABS interest or ABS
interests: (1) collateralized by the issuing
entity’s securitized assets and servicing assets
(other than servicing assets collateralizing only
specific series in connection with administering
the revolving pool securitization and/or assets
that are not eligible under the terms of the
securitization transaction to be included when
determining whether the revolving pool
securitization holds aggregate securitized
assets in specified proportions to aggregate
outstanding investor ABS interests issued); (2)
that are pari passu with each series of investor
ABS interests issued, or partially or fully
subordinated to one or more series in identical
or varying amounts, with respect to the
allocation of all distributions and losses with
respect to the securitized assets prior to early
amortization of the revolving pool securitization
Under the multi-level revolving pool provisions, if a revolving pool securitization issues collateral
certificates representing a beneficial interest in some or all of its securitized assets to another
revolving pool securitization, which then issues ABS interests collateralized wholly or partially by
such collateral certificates, a sponsor may satisfy the RRRs by retaining the seller's interest for the
assets represented by the collateral certificates through either revolving pool securitization, so long
as the interest is retained at the direction of the same sponsor or its wholly-owned affiliates. Final
Rule §___.5(e)(2).
The 5% seller's interest required to be satisfied as of each seller measurement date may be
reduced dollar-for-dollar by the balance, as of such date, of a segregated excess funding account
satisfying certain criteria. Final Rule §___.5(f).
These combined retention provisions contemplate a reduction in the 5% seller's interest
requirement to the extent that for all series of investor ABS interests issued after the Final Rule’s
applicable effective date for pool securitizations, the sponsor or a wholly-owned affiliate retains, a
corresponding percentage of the fair value of ABS interests issued in each series, as one or more
of the horizontal residual interests meeting certain other specified criteria. Final Rule §___.5(g); see
also Final Rule §___.5(h) and (i).
The early amortization provisions contemplate that a sponsor relying on the revolving pool
securitization approach will not be in violation of the rule if it fails to satisfy the RRRs after the
revolving pool securitization commences early amortization of all series of outstanding investor
ABS interests pursuant to the terms of its transaction document. However, this is subject to various
requirements, including that the revolving pool securitization issue no additional ABS interests to
any person not a wholly-owned affiliate of the sponsor, either at the time of issuance or during the
amortization period. Final Rule §___.5(l).
U.S. Regulators Adopt Final Risk Retention Rule for Securitizations
12
(as specified in the securitization transaction
documents); and (3) that adjusts for
fluctuations in the outstanding principal
balance of the securitized assets in the pool.
Collateral = in respect of any issuance of ABS
interests, the assets that provide the cash flow
and the servicing assets that support such cash
flow for the ABS interests regardless of the
issuance’s legal structure, including security
interests in assets or other property of the
issuing entity or interests in such property or
rights to cash flow from such assets and related
servicing assets; and, assets or other property
collateralize an issuance of ABS interests if
they serve as collateral for such issuance.
Measuring the seller’s interest
In measuring the ratio of the retained seller’s interest (the numerator) to the aggregate outstanding
investor ABS interests issued by the revolving pool securitization as a whole (the denominator):
(1) The unpaid principal balance of the securitized assets for the numerator of the 5% ratio shall
not include servicing assets collateralizing only specific series in connection with administering
the revolving pool securitization and/or assets that are not eligible under the terms of the
securitization transaction to be included when determining whether the revolving pool
securitization holds aggregate securitized assets in specified proportions to aggregate
outstanding investor ABS interests issued;
(2) The aggregate unpaid principal balance of outstanding investor ABS interests in the
denominator of the 5% ratio may be reduced by the amount of funds held in a segregated
principal accumulation account for the repayment of outstanding investor ABS interests, if:
(i) The terms of the securitization transaction documents prevent funds in the principal
accumulation account from being applied for any purpose other than the repayment of the
unpaid principal of outstanding investor ABS interests; and
(ii) Funds in that account are invested only in the types of assets in which funds held in an
eligible horizontal cash reserve account pursuant to the standard risk retention option are
permitted to be invested;
(3) If the terms of the securitization transaction documents set minimum required seller’s interest
as a proportion of the unpaid principal balance of outstanding investor ABS interests for one
or more series issued, rather than as a proportion of the aggregate outstanding investor ABS
interests in all outstanding series combined, the percentage of the seller's interest for each
such series must, when combined with the percentage of any minimum seller's interest set by
reference to the aggregate outstanding investor ABS interests, equal at least 5%.
4.2.3 There are also special disclosure requirements for sponsors
using the “seller’s interest” approach.35
4.3
Eligible ABCP conduits36
4.3.1
35
36
The Final Rule allows an ABCP conduit sponsor to satisfy the
RRRs with respect to the issuance of ABCP by utilizing an
eligible ABCP conduit in a securitization transaction if the
Final Rule §___.5(k).
Final Rule §___.6.
U.S. Regulators Adopt Final Risk Retention Rule for Securitizations
13
below conditions are satisfied for each ABS interest the ABCP
conduit acquires from an intermediate SPV:
(i)
an originator-seller of the intermediate SPV retains an
economic interest in the credit risk of the assets
collateralizing the ABS interest acquired by the eligible
ABCP conduit in the amount and manner as would be
required to satisfy the RRRs under the standard risk
retention approach or the revolving pool securitization
approach;37 and
(ii)
the ABCP conduit sponsor:
(a) approves each originator-seller permitted to sell or
transfer assets, directly or indirectly, to an
intermediate SPV from which an eligible ABCP
conduit acquires ABS interests;
(b) approves each intermediate SPV from which an
eligible ABCP conduit is permitted to acquire ABS
interests;
(c) establishes criteria governing the ABS interests, and
the securitized assets underlying the ABS interests,
acquired by the ABCP conduit;
(d) administers the ABCP conduit; and
(e) maintains and adheres to policies and procedures
for ensuring that these requirements have been met.
4.3.2
The originator-seller that sponsors ABS interests acquired by an
eligible ABCP conduit must still comply with the RRRs applicable
to it. Sales and transfers of ABS interests are also permitted
between eligible ABCP conduits, provided that both have
sponsors in compliance with the Final Rule’s requirements noted
above and the same regulated liquidity provider has entered into
one or more legally binding commitments to provide 100%
liquidity coverage to all the ABCP issued by both eligible ABCP
conduits.
ABCP = an asset-backed commercial paper
that has a maturity at the time of issuance not
exceeding 397 days, exclusive of days of
grace, or any renewal thereof the maturity of
38
which is likewise limited.
37
38
Regulated liquidity provider = (1) a depository
institution; (2) a bank holding company, or a
subsidiary; (3) a savings and loan holding
company or a subsidiary thereof; or (4) a foreign
bank whose home country supervisor has
adopted capital standards consistent with the
Final Rule §___.6(b)(1).
The Relevant Regulators determined that ABCP paper may in the future have a longer maturity to
accommodate new liquidity requirements including liquidity coverage ratios under the Basel liquidity
standards. See Final Rule at pages 152 and 166.
U.S. Regulators Adopt Final Risk Retention Rule for Securitizations
14
Capital Accord of the Basel Committee on
Banking Supervision, as amended, and that is
subject to such standards, or a subsidiary.
Intermediate SPV = an SPV that: (1) (i) is a
direct or indirect wholly-owned affiliate of the
originator-seller or (ii) has nominal equity
owned by a trust or corporate service provider
that specializes in providing independent
ownership of special purpose vehicles, and
such trust or corporate service provider is not
affiliated with any other transaction parties; (2)
is bankruptcy remote from the eligible ABCP
conduit, and from each originator-seller, and
each majority-owned affiliate in each case
that, directly or indirectly, sells or transfers
assets to such intermediate SPV; (3) acquires
assets from the originator-seller that are
originated by the originator-seller or acquired
by the originator-seller in the acquisition of a
business that qualifies for business
combination accounting under U.S. GAAP or
acquires ABS interests issued by another
intermediate SPV of the originator-seller that
are collateralized solely by such assets; and
(4) issues ABS interests collateralized solely
by such assets, as applicable.
Originator-seller = an entity that originates
assets and sells or transfers those assets
directly, or through a majority-owned affiliate, to
an intermediate SPV, and includes (except for
the purposes of identifying the sponsorship and
affiliation of an Intermediate SPV) any affiliate of
the originator-seller that, directly or indirectly,
majority controls, is majority controlled by or is
under common majority control with the
39
originator-seller.
ABCP conduit = an issuing entity with respect
to ABCP.
100% liquidity coverage = means an amount
equal to the outstanding balance of all ABCP
issued by the conduit plus any accrued and
unpaid interest without regard to the
performance of the ABS interests held by the
ABCP conduit and without regard to any credit
enhancement.
Eligible ABCP conduit = an ABCP conduit, provided that:
(1) The ABCP conduit is bankruptcy remote from the sponsor and from any intermediate SPV;
(2) The ABS interests acquired by the ABCP conduit are:
(i) ABS interests collateralized solely by assets originated by an originator-seller and by
servicing assets;
(ii) special units of beneficial interest (or similar ABS interests) in a trust or special purpose
vehicle that retains legal title to leased property underlying leases originated by an
originator-seller that were transferred to an intermediate SPV in connection with a
securitization collateralized solely by such leases and by servicing assets;
(iii) ABS interests in a revolving pool securitization collateralized solely by assets originated by
an originator-seller and by servicing assets; or
(iv) ABS interests described in (i), (ii) and (iii) above that are collateralized, in whole or in part,
by assets acquired by an originator-seller in a business combination that qualifies for
business combination accounting under U.S. GAAP, and, if collateralized in part, the
remainder of such assets meet the criteria in (i), (ii) and (iii) above; and
(v) acquired by the ABCP conduit in an initial issuance by or on behalf of an intermediate SPV
39
For purposes of this definition, majority control means ownership of more than 50% of the equity of
an entity, or ownership of any other controlling financial interest in the entity, as determined under
U.S. GAAP.
U.S. Regulators Adopt Final Risk Retention Rule for Securitizations
15
(A) directly from the intermediate SPV, (B) from an underwriter of the ABS interests issued
by the intermediate SPV, or (C) from another person who acquired the ABS interests
directly from the intermediate SPV;
(3) The ABCP conduit is collateralized solely by ABS interests acquired from intermediate SPVs
as described in paragraph (2) of this definition and servicing assets; and
(4) A regulated liquidity provider has entered into a legally binding commitment to provide 100%
liquidity coverage to all the ABCP issued by the ABCP and such coverage may not be
conditional on the credit performance of the ABS interest held by the ABCP or limited only to
performing ABS interests.
Measuring the seller’s interest
In measuring the ratio of the retained seller's interest (the numerator) to the aggregate outstanding
investor ABS interests issued by the revolving pool securitization as a whole (the denominator):
(1) The unpaid principal balance of the securitized assets for the numerator of the 5% ratio shall
not include servicing assets collateralizing only specific series in connection with administering
the revolving pool securitization and/or assets that are not eligible under the terms of the
securitization transaction to be included when determining whether the revolving pool
securitization holds aggregate securitized assets in specified proportions to aggregate
outstanding investor ABS interests issued;
(2) The aggregate unpaid principal balance of outstanding investor ABS interests in the
denominator of the 5% ratio may be reduced by the amount of funds held in a segregated
principal accumulation account for the repayment of outstanding investor ABS interests, if:
(i) The terms of the securitization transaction documents prevent funds in the principal
accumulation account from being applied for any purpose other than the repayment of the
unpaid principal of outstanding investor ABS interests; and
(ii) Funds in that account are invested only in the types of assets in which funds held in an
eligible horizontal cash reserve account pursuant to the standard risk retention option are
permitted to be invested;
(3) If the terms of the securitization transaction documents set minimum required seller's interest
as a proportion of the unpaid principal balance of outstanding investor ABS interests for one
or more series issued, rather than as a proportion of the aggregate outstanding investor ABS
interests in all outstanding series combined, the percentage of the seller's interest for each
such series must, when combined with the percentage of any minimum seller's interest set by
reference to the aggregate outstanding investor ABS interests, equal at least 5%.
4.3.3
4.4
CMBS41
4.4.1
40
41
There are also special disclosure requirements with respect to
this option.40
The Final Rule permits a sponsor to satisfy some or all of the
RRRs with respect to CMBS if a third party purchaser (or any
majority-owned affiliate thereof) (each, a “TPP”) purchases and
holds for its own account an eligible horizontal residual
interest in the issuing entity in the same form, amount, and
manner as would be held by the sponsor under the standard risk
retention approach and various conditions are met, including,
among others:
Final Rule §___.6(d).
Final Rule §___.7.
U.S. Regulators Adopt Final Risk Retention Rule for Securitizations
16
42
43
(i)
a maximum of two TPPs (and, if two, their interests are
pari passu);
(ii)
collateral solely commercial real estate loans and
servicing assets;
(iii)
TPPs pay for their eligible horizontal residual interest(s)
in cash at closing and do not receive financing from any
party or any affiliate of any party to the securitization
transaction (other than investors that are parties solely
by being investors);
(iv)
TPPs independently review the credit risk of each
securitized asset prior to the sale of the asset-backed
securities; and
(v)
no TPP is affiliated with any party to the securitization
transaction (other than investors, the special servicer or
one or more originators (as long as the assets they
originated collectively comprise less than 10% of the
unpaid principal balance of the securitized assets
included at the cut-off date of the securitization
transaction)).
4.4.2
The securitization documents must provide for the appointment
of an independent “Operating Advisor” meeting certain criteria
and which is required to act in the best interest of, and for the
benefit of, investors as a collective whole.
4.4.3
Each TPP and its affiliates, generally, must comply with the
normal hedging and other transfer restrictions (as discussed
below) as if each were the retaining sponsor that had acquired
an eligible horizontal residual interest; provided that such
restrictions will not apply on or after the date that each CRE loan
serving as collateral for outstanding ABS interests has been
defeased.42 An initial TPP or a sponsor that acquired an eligible
horizontal residual interest at closing may, on or after the date
that is five years after the date of the closing of a
securitization transaction, transfer that interest to a
subsequent TPP satisfying certain conditions.43
A loan will be deemed “defeased” if: (A) cash or cash equivalents of the types permitted for an
eligible horizontal cash reserve account under the standard risk retention model (whose maturity
corresponds to the remaining debt service obligations) have been pledged to the issuing entity as
collateral for the loan and are in such amounts and payable at such times as necessary to timely
generate cash sufficient to make all remaining debt service payments due on such loan and (B) the
issuing entity has an obligation to release its lien on the loan.
Final Rule §___.7(b)(8)(ii). Subsequent TPPs may also transfer to other subsequent TPPs subject
to complying with Final Rule §___.7(b)(8)(ii)(C). See Final Rule §___.7(b)(8)(ii)(B).
U.S. Regulators Adopt Final Risk Retention Rule for Securitizations
17
4.5
4.4.4
The retaining sponsor is responsible for compliance by itself and
for compliance by each initial or subsequent TPP. A sponsor
relying on the non-standard CMBS risk retention option must
maintain and adhere to policies and procedures to monitor each
TPP’s compliance. If the sponsor determines a TPP is no longer
in compliance, it must promptly notify, or cause to be notified, the
holders of the ABS interests issued in the securitization
transaction of such TPP’s noncompliance.
4.4.5
There are also special disclosure requirements with respect to
this option.44
Federal National Mortgage Association and Federal Home Loan
Mortgage Corporation ABS45
The Final Rule provides that the RRRs will be satisfied where the
sponsor fully guarantees timely payment of principal and interest on all
ABS interests issued by the issuing entity in the securitization transaction
and the sponsor is one of the entities enumerated.46
4.6
Qualified tender option bonds47
The Final Rule provides that in respect of certain types of municipal bond
repackagings the RRRs can be satisfied either through the standard risk
retention approach or by the sponsor holding the relevant municipal
bonds in an amount sufficient to satisfy the RRRs.48
5
Restrictions on hedging and transfer49
5.1
The retaining sponsor is not permitted to sell or transfer its retained risk
to anyone other than a majority-owned affiliate (and each such majorityowned affiliate shall be subject to the same restrictions). A retaining
sponsor and its majority-owned affiliates cannot hedge the retained risk
nor can the issuing entity do so. Pledging retained interests on a nonrecourse basis is prohibited. Hedging interest rate risk (other than the
specific spread risk associated with the ABS interest) and foreign
exchange risk are permitted. Transactions linked to indices which include
a relevant ABS interest are not prohibited, provided that no class of ABS
interests comprises more than 10% of the index and all classes of ABS
interests in respect of a securitization comprise less than 20% of the
index.
44
45
46
47
48
49
Final Rule §___.7(b)(7).
Final Rule §___.8.
See Final Rule §___.8(a) for the list of entities.
Final Rule §___.10.
See Final Rule §___.10. Tender option bonds with notice periods up to 397 days now qualify for
this option, corresponding to the maximum remaining maturity of securities that money market
funds may purchase under Rule 2a-7 under the Investment Company Act.
Final Rule §___.12.
U.S. Regulators Adopt Final Risk Retention Rule for Securitizations
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5.2
Except in respect of securitization transactions 100% collateralized by
RMBS (which are subject to longer sunset provisions),50 these hedging,
transfer and financing restrictions expire on or after the date that is the
latest of:
5.2.1
the date when the unpaid principal balance (if applicable) of the
securitized assets is reduced to 33% of the unpaid principal
balance of the securitized assets as of the securitization cut-off
date;
5.2.2
the date when total unpaid principal obligations under the ABS
interests issued in the securitization transaction have been
reduced to 33% of the total unpaid principal obligations of the
ABS interests at closing of the securitization transaction; or
5.2.3
two years after the date of the closing of the securitization
transaction.51
6
Special products excluded
6.1
Qualified residential mortgages
Subject to various conditions,52 the RRRs will not apply to RMBS
collateralized 100% by qualified residential mortgages.
6.2
Qualifying commercial loans, CRE loans and auto loans
Subject to various conditions, the RRRs will not apply to ABS
collateralized 100% by qualifying commercial loans, qualifying CRE loans
and qualifying auto loans. Blending qualifying assets with non-qualifying
assets of the same type is permissible, but the RRRs will still apply albeit
on a reduced basis based on the ratio of unpaid qualifying assets to the
total unpaid balance.53 The minimal risk retention requirement possible in
a blended pool is 2.5%, even if the ratio exceeds 50%.
6.3
Underwriting standards for qualifying commercial loans, CRE loans
and auto loans
The underwriting standards for each of these asset classes are set forth
in detail in the Final Rule and are better understood by reviewing the
complete list rather than a summary.54
50
51
52
53
54
Final Rule §___.12(f)(2) (Generally, the later of (i) five years after the date of closing of the
securitization transaction or (ii) the date on which the total unpaid principal balance of the
residential mortgages that collateralize the securitization transaction has been reduced to 25% of
the total unpaid principal balance of such residential mortgages at closing. However, the sponsor’s
restrictions expire seven years after the date of the closing.).
Final Rule §___.12(f)(1).
Final Rule §___.15(a)(1)-(4).
Final Rule §___.15(b).
Final Rule §§___.16 -___.18.
U.S. Regulators Adopt Final Risk Retention Rule for Securitizations
19
Exemptions55
7
The following are exempt from the RRRs assuming they satisfy various
requirements. Other than in the few most relevant instances, we have not
included below the granular details of those requirements, but the
complete details of each can be found in the Final Rule:
7.1
U.S. Government-backed securitizations.56
7.2
Certain agricultural loan securitizations.57
7.3
State and municipal securitizations.58
7.4
Qualified scholarship funding bonds.59
7.5
Pass-through resecuritizations.
7.6
Any securitization transaction that: (i) is collateralized solely by servicing
assets, and by ABS: for which the RRRs were satisfied or that are
exempt from the RRRs; (ii) involves the issuance of only a single class of
ABS interests; and (iii) provides for the pass-through of all principal and
interest payments received on the underlying asset-backed securities
(net of expenses of the issuing entity) to the holders of such class.60
7.7
First-pay-class securitizations.61
7.8
Seasoned loans
(i) any securitization transaction that is collateralized solely (x) by
servicing assets, and (y) by seasoned loans that meet the following
requirements: (A) the loans have not been modified since origination; and
(B) none of the loans have been delinquent for 30 days or more. (ii) For
purposes of this paragraph, a seasoned loan means: (A) with respect to
ABS collateralized by residential mortgages, a loan that has been
outstanding and performing for the longer of: (1) five years; or (2) until
the loan’s outstanding principal balance has been reduced to 25% of the
original principal balance. Notwithstanding (1) or (2), any performing
residential mortgage loan that has been outstanding for a period of at
least seven years shall be deemed a seasoned loan. (B) For all other
classes of ABS, a performing loan that has been outstanding for the
longer of: (1) a period of at least two years; or (2) until the loan’s
outstanding principal balance has been reduced to 33% of the original
principal balance.62
55
56
57
58
59
60
61
62
Final Rule §___.19.
See Final Rule §___.19(b)(1).
See Final Rule §___.19(b)(2).
See Final Rule §___.19(b)(3).
See Final Rule §___.19(b)(4).
See Final Rule §___.19(b)(5).
See Final Rule §___.19(b)(6).
See Final Rule §___.19(b)(7).
U.S. Regulators Adopt Final Risk Retention Rule for Securitizations
20
7.9
Certain public utility securitizations.63
7.10
Certain student loan transactions.64
7.11
Assets issued, insured or guaranteed by the United States.65
7.12
Community-focused lending securitizations66
In any securitization transaction that includes both community-focused
residential mortgages and residential mortgages that are not exempt
from the RRR, the percentage of risk retention required under the
standard risk retention approach is reduced by the ratio67 of the unpaid
principal balance of the community-focused residential mortgages to the
total unpaid principal balance of residential mortgages that are included
in the pool of assets collateralizing the asset-backed securities issued
pursuant to the securitization transaction. The minimal risk retention
requirement possible in a blended mortgage pool is 2.5%, even if the
ratio exceeds 50%. This exemption is not available if the ABS issued in
the securitization are collateralized solely by community-focused
residential mortgages and servicing assets.
7.13
Certain three-to-four unit mortgage loans.68
7.14
FDIC in its capacity as receiver or conservator sponsoring a
securitization transaction.69
8
Foreign securitizations70
8.1
Foreign securitizations satisfying certain conditions are exempt from the
RRRs. Those conditions include:
63
64
65
66
67
68
69
70
71
8.1.1
the securitization transaction is not required to be and is not
registered under the Securities Act of 1933;
8.1.2
no more than 10% of the dollar value of all classes of ABS
interests in the securitization transaction is sold or transferred to
U.S. persons or for the account or benefit of U.S. persons;71
8.1.3
neither the sponsor nor the issuing entity is: (i) chartered,
incorporated, or organized under the laws of the United States or
any State (or an unincorporated branch or office of such an
entity); or (ii) an unincorporated branch or office located in the
See Final Rule §___.19(b)(8).
See Final Rule §___.19(e).
See Final Rule §___.19(c).
See Final Rule §___.19(f).
The ratio is measured as of the cut-off date or similar date for establishing the composition of the
pool assets collateralizing the asset-backed securities issued pursuant to the securitization
transaction.
See Final Rule §___.19(g).
See Final Rule §___.19(d).
Final Rule §___.20.
See Section 10.1 of this Client Note for more information about this calculation.
U.S. Regulators Adopt Final Risk Retention Rule for Securitizations
21
United States or any State of an entity that is chartered,
incorporated, or organized under the laws of a jurisdiction other
than the United States or any State; and
8.1.4
8.2
72
if the sponsor or issuing entity is chartered, incorporated, or
organized under the laws of a jurisdiction other than the United
States or any State, no more than 25% (as determined based on
unpaid principal balance) of the assets that collateralize the ABS
interests sold in the securitization transaction were acquired by
the sponsor or issuing entity, directly or indirectly, from: (i) a
majority-owned affiliate of the sponsor or issuing entity that is
chartered, incorporated, or organized under the laws of the
United States or any State; or (ii) an unincorporated branch or
office of the sponsor or issuing entity that is located in the United
States or any State.
This safe harbor is not available for any transaction(s) that, although
otherwise technically eligible, is part of a plan or scheme to evade the
requirements of Section 15G and the RRRs. Note that the Final Rule also
includes an express definition of U.S. person that is largely similar, but
not identical, to the definition of “U.S. person” under Regulation S. The
Final Rule’s definition is reproduced in the footnote.72
U.S. person means: Any of the following: (i) Any natural person resident in the United States; (ii)
Any partnership, corporation, limited liability company, or other organization or entity organized or
incorporated under the laws of any State or of the United States; (iii) Any estate of which any
executor or administrator is a U.S. person; (iv) Any trust of which any trustee is a U.S. person; (v)
Any agency or branch of a foreign entity located in the United States; (vi) Any non-discretionary
account or similar account (other than an estate or trust) held by a dealer or other fiduciary for the
benefit or account of a U.S. person; (vii) Any discretionary account or similar account (other than an
estate or trust) held by a dealer or other fiduciary organized, incorporated, or (if an individual)
resident in the United States; and (viii) Any partnership, corporation, limited liability company, or
other organization or entity if: (A) Organized or incorporated under the laws of any foreign
jurisdiction; and (B) Formed by a U.S. person principally for the purpose of investing in securities
not registered under the Act; and ‘‘U.S. person(s)’’ does not include: (i) Any discretionary account
or similar account (other than an estate or trust) held for the benefit or account of a person not
constituting a U.S. person by a dealer or other professional fiduciary organized, incorporated, or (if
an individual) resident in the United States; (ii) Any estate of which any professional fiduciary acting
as executor or administrator is a U.S. person if: (A) An executor or administrator of the estate who
is not a U.S. person has sole or shared investment discretion with respect to the assets of the
estate; and (B) The estate is governed by foreign law; (iii) Any trust of which any professional
fiduciary acting as trustee is a U.S. person, if a trustee who is not a U.S. person has sole or shared
investment discretion with respect to the trust assets, and no beneficiary of the trust (and no settlor
if the trust is revocable) is a U.S. person; (iv) An employee benefit plan established and
administered in accordance with the law of a country other than the United States and customary
practices and documentation of such country; (v) Any agency or branch of a U.S. person located
outside the United States if: (A) The agency or branch operates for valid business reasons; and (B)
The agency or branch is engaged in the business of insurance or banking and is subject to
substantive insurance or banking regulation, respectively, in the jurisdiction where located; (vi) The
International Monetary Fund, the International Bank for Reconstruction and Development, the InterAmerican Development Bank, the Asian Development Bank, the African Development Bank, the
United Nations, and their agencies, affiliates and pension plans, and any other similar international
organizations, their agencies, affiliates and pension plans. Final Rule §___.20(a).
U.S. Regulators Adopt Final Risk Retention Rule for Securitizations
22
Additional exemptions73
9
The regulators having authority with respect to particular types of assets
are empowered to provide jointly a total or partial exemption for any
securitization transaction as they may determine in the public interest
and for the protection of investors.74 Additionally, the Federal banking
agencies and the SEC, in consultation with the Federal Housing Finance
Agency and the Department of Housing and Urban Development, may
jointly adopt or issue exemptions, exceptions or adjustments to the
RRRs.75
10
The Final Rule and foreign securitizations
10.1
One of the conditions which must be satisfied for a foreign securitization
to be able to benefit from the safe harbor is that no more than 10% of the
dollar value of ABS interests in the securitization are “sold or transferred”
to U.S. persons. The regulators clarified in the Final Rule that, in general,
for the calculation of the 10% limit only those ABS interests sold in the
initial distribution of ABS interests are to be counted. While the
calculation need only be made on the date of the initial distribution, if
different classes or portions of the same class of ABS interests are
distributed by or on behalf of the issuing entity or a sponsor on different
dates, the 10% limit would need to be calculated on each such
distribution date by reference to the dollar value of all ABS interests in
the securitization up to and including such distribution date.
10.2
The Relevant Regulators did note that under circumstances indicating that
secondary sales were contemplated at the time of the issuance (and not
included for purposes of calculating the 10% limit), then such scheme may
be viewed as part of a plan or scheme to evade the requirements of the rule
and would thus not be able to utilize the safe harbor.
10.3
The size of any retained interest must be measured using fair value
determined in accordance with U.S. GAAP, while most non-U.S.
sponsors will use their own local GAAP or International Financial
Reporting Standards for accounting purposes.
10.4
Some of the proposed qualified asset definitions refer to US-specific
criteria which it may prove difficult, or impossible, for non-U.S. assets to
comply with.
73
74
75
Final Rule §___.21.
Final Rule §___.21(a).
Final Rule §___.21(b).
U.S. Regulators Adopt Final Risk Retention Rule for Securitizations
23
Contacts
For further information
please contact:
10.5
Structures typically used in some non-U.S. jurisdictions (including
Europe) for mortgage master trusts, ABCP conduits, arbitrage CLOs
and CMBS transactions may struggle to fall within the specific
provisions included in the Final Rule for those types of transactions,
which have clearly been drafted with U.S. deal structures in mind.
Caird Forbes-Cockell
Partner
+1 212 903 9040
[email protected]
Jeffrey Cohen
Partner
+1 212 903 9014
[email protected]
Mark Middleton
Partner
+1 212 903 9232
[email protected]
Robin Maxwell
Partner
+1 212 903 9147
[email protected]
Noah Melnick
Counsel
+1 212 903 9203
[email protected]
Jacques Schillaci
Associate
+1 212 903 9341
[email protected]
Edward Ivey
Associate
+1 212 903 9118
[email protected]
This publication is intended merely to highlight issues and not to be comprehensive, nor to provide legal advice. Should
you have any questions on issues reported here or on other areas of law, please contact one of your regular contacts, or
contact the editors.
Victoria Bourke
Associate
+1 212 903 9122
© Linklaters LLP. All Rights reserved 2014
[email protected]
Author: Some of the individuals listed as Contacts.
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U.S. Regulators Adopt Final Risk Retention Rule for Securitizations
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