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U.S. risk retention proposals published


04 August 2011

In March 2011, the U.S. agencies approved and published the Notice of Proposed Rulemaking (NPR) with respect to the risk retention rules to be made under section 941 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act).  

Given that the risk retention provisions in the Dodd-Frank Act operate largely as placeholders and leave the details to the implementing rules, the NPR represents an important step in the development of the proposed U.S. regime and arguably provides the first real insight into what the authorities think "skin in the game" should look like in the U.S. Running to almost 400 pages in length, the NPR is likely to generate significant interest and debate among ABS market participants in the coming months as responses are formulated to the numerous questions provided for comment.

While the debate on first principles with respect to U.S. risk retention continues, the stage of the debate in Europe is very different. In the EU, retention requirements have been on the books for almost two years and such requirements took effect for new securitisations from the start of this year, meaning that the current focus is on how to sensibly comply. Various questions remain outstanding in this regard and, once the U.S. requirements are finalised, this list may grow longer as market participants will need to consider how the two regimes will fit together.

There are a number of differences and inconsistencies between the EU requirements (set out in article 122a of the EU Capital Requirements Directive) and the U.S. proposals. These differences are likely to prove significant in the context of deals where it would be necessary to comply with both regimes. Unfortunately, given the manner in which the initiatives are framed, overlapping application cannot be ruled out. In particular, it appears that this may be relevant in the context of certain common deal arrangements, including, e.g., a U.S. originated deal where it is necessary or desirable to comply with article 122a to ensure that the relevant ABS may be held by an EU regulated bank (or its consolidated entities) and/or (based on the NPR proposals) an EU originated deal which involves a Rule 144A offering if such deal is also intended to be available for investment by relevant EU regulated entities.

Notwithstanding calls from market participants (and the G20) for cross-border coordination on retention (which could involve a mutual recognition and acceptance process between authorities), thus far the retention initiatives have developed independently and without provision for sensible interaction. In the absence of any movement on this front, it is not clear how market participants will be able to bridge the (significant) "gap" between the two regimes and clearly comply with both in all relevant circumstances.

We note that the deadline for responses on the proposed rules is 1 August 2011 (extended from the original deadline of 10 June 2011). We encourage interested clients to provide comments on the proposals.

With respect to when the rules will apply, the Dodd-Frank Act indicates that the rules will become effective (i) one year after the final rules are published in the case of securities backed by residential mortgages and (ii) two years after such rules are published for all other ABS.

For further information on the risk retention initiatives in the EU and the U.S., we encourage clients to contact us and/or to refer to the materials on our ABS Regulatory Reform Roadmap website (further information linked here).


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