Retention Requirements for ABS The New Regulatory Landscape in the U.S. and Europe
By Charles Roberts, Conor Downey, Ron Lanning & Diego Shin
While there has been some improvement in at least certain areas of the financial markets, the asset backed securities (ABS) market has yet to see any evidence of significant recovery since the onslaught of the credit crisis. In this current climate of suspicion, if not outright hostility, towards structured products, regulators are seizing the opportunity to propose and implement measures that will have long lasting effects on the ABS market going forward.
As with respect to the new rules being put into place, no single proposed measure will have a greater impact on the securitisation industry than the requirement that originators retain a portion of newly issued ABS. The stated purpose of this measure is to align the interests of investors with that of originators. The rules in both Europe and the U.S. have set retention at 5 per cent, which may be met by the ownership of an equivalent percentage in each ABS issued tranche (a Vertical Slice) net of any hedging or other credit risk transfer arrangement, or meeting certain other retention requirements or other requirements, the standards of which differ between Europe and the U.S.
This memorandum explores the retention requirements both approved and proposed for both Europe and the U.S.