On December 28, 2018, the Japanese Financial Services Agency (the “JFSA”) published proposed risk retention rules applicable to Japanese investors in securitization transactions. To avoid their securitization position receiving adverse treatment through an increased risk weighting in the calculation of its compliance with regulatory capital requirements, among other disciplinary actions, Japanese investors would be required to confirm that “originators” of securitization transactions hold a 5% exposure to such transactions, as well as meet other monitoring requirements. The proposed rules may affect U.S. and European collateralized loan obligations (“CLO”), as Japanese investors are active in the CLO market. However, it is not clear whether the rules would apply to CLOs, as the rules are not intended to apply to transactions where the “original assets were not inappropriately formed”. Industry groups are submitting comments to the proposed rules and argue that CLOs are not inappropriately formed since CLO managers are usually not involved in the origination of the original assets ultimately deposited into the CLO. However, it has been reported that the JFSA does not expect to make broad exceptions for any particular type of securitization. The expected effective date of the final rules is March 31, 2019. For trustees on U.S. CLOs, the re-introduction of risk retention rules into U.S. CLOs may necessitate additional document protections to clarify that trustees are not monitoring or verifying compliance on behalf of investors. Additionally, depending on how compliance may be achieved, there may be opportunities for service providers to take on additional roles in risk retention facilities that may be developed to comply with the proposed rules.
If you would like further information about this or any other matter, please feel free to contact any member of the Global Bank and Institutional Finance & Restructuring Group.