Final Risk Retention Rule: Special ABCP Conduit Option

November 13, 2014

In October 2014, the SEC, FDIC, Federal Reserve, OCC, FHA and HUD (the Joint Regulators) adopted a final rule (the Final Rule) to implement the credit risk retention requirements of
Section 941 of the Dodd-Frank Act. Section 941 required the Joint Regulators to jointly implement rules to require any securitizer 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 (ABS), transfers to a third party. 

The Final Rule requires a sponsor of most ABS transactions (including privately placed issuances) to retain at least 5% of the credit risk of the assets collateralizing the ABS and restricts the transfer, hedging or pledge of credit risk that the sponsor is required to retain.

Unless an exemption is available, sponsors must retain risk in accordance with the standardized risk retention options (i.e., an eligible horizontal residual interest, an eligible vertical interest or a combination of both) or in accordance with one of the risk retention options available for specific types of securitizations.

Consistent with the Re-proposed Rule, the Final Rule includes a risk retention option specifically designed for certain asset-backed commercial paper (ABCP) structures. Although the Joint Regulators have made some modifications to the Re-proposed Rule intended to accommodate a wider variety of ABCP market practices, the special ABCP conduit risk retention option remains largely unchanged.

Click here for a copy of the Final Rule. For more information on the special ABCP conduit risk retention option, please click the link below.

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