U.S. regulators have approved a final rule requiring firms that underwrite securitization vehicles to retain risk in those transactions.
The final rule, which has been approved by six federal agencies, represents another step in post-financial crisis reforms for the U.S. financial industry, and implements requirements outlined in the Dodd-Frank reform legislation. Among other things, it requires sponsors of asset-backed securities (ABS) to retain at least 5% of the credit risk of the assets collateralizing the securitization vehicle. It also imposes prohibitions on transferring or hedging the credit risk that the sponsor is required to retain.
The rule exempts securitizations of “qualified residential mortgages” from the new risk retention requirement. And, it does not impose any risk retention requirements on certain securitizations of commercial loans, commercial mortgages, or automobile loans. The new requirements will take effect in one year for residential mortgage-backed securitizations, and after two years for all other types of deals.
Introducing the final rule, Mary Jo White, chair of the U.S. Securities and Exchange Commission (SEC), said, “Today, we take another significant step to reform the asset-backed securities market. The credit risk retention requirements mandated by the Dodd-Frank Act are designed to realign the incentives of securitizers and investors by requiring securitizers to retain an economic interest in the credit risk of the assets they securitize.”
The U.S. industry trade group, the Securities Industry and Financial Markets Association (SIFMA), gave the final rule a mixed review however. SIFMA president and CEO, Kenneth Bentsen, Jr., noted that the rule “will help clarify the regulatory ‘rules of the road’ for securitization. This will bring some relief to the regulatory uncertainty that has been a negative factor in the recovery of non-government guaranteed mortgage securitization.”
However, he expressed disappointment that there weren’t more modifications of the proposals for collateralized loan obligations (CLOs), saying that it is “concerned that the rules may have a negative impact on the ability of CLOs to fund credit creation. This is important because CLOs are a key source of funding for Main Street businesses and other corporate borrowers, and this funding could become more expensive and less available.”
The final rule is being issued jointly by the U.S. Federal Reserve, the SEC, the Department of Housing and Urban Development (HUD), the Federal Deposit Insurance Corp. (FDIC), the Federal Housing Finance Agency (FHFA), and the Office of the Comptroller of the Currency (OCC).