Proposed Risk Retention Rules Trouble Abcp Market

Abstract

As required by the Dodd-Frank Act, the Federal Reserve Board, the Securities and Exchange Commission and other federal regulators are moving forward with plans to require risk retention in most securitizations and are likely to approve final risk retention rules in early 2014. Although in developing the rules the regulators have endeavored to take into account the unique features of different securitization markets, the retention rules that those regulators have proposed for asset-backed commercial paper (ABCP) conduits fail to recognize the substantial differences that exist between ABCP programs and other securitization structures. The proposed rules would impose operating restrictions and disclosure obligations on ABCP conduits and their sponsors that could have a significant adverse impact on the ABCP market. In particular, those rules would require conduit sponsors to retain horizontal or vertical credit risk in their conduits or to comply with a narrow safe harbor that would (among other issues) limit the categories of assets that the conduits could finance. This article describes the risk retention rules that the regulators have proposed for ABCP conduits and discusses the compliance options available to conduit sponsors and the practical difficulties that each option would create.