2016: The Year of Risk Retention

As the markets lift off for the new year, we suspect that 2016 might wind up becoming best known as the year when the dust and clouds surrounding risk retention for a securitization structures, all began to clear.

Over the years, there has been no shortage of prognostications for exactly how the “skin-in-the-game” rules, coming on the back of the structured credit market’s collapse (now more than eight years ago), would ultimately affect the long term prospects for a healthy and vibrant global structured finance marketplace.

Much attention has been focused on three major topics; the general impact of proposed new rules for the euro-securitization market, the global CLO market and the US residential mortgage-backed market.  Some have predicted complete disaster for one or all of these markets.  Others have loudly applauded these changes (although it is hard to understand how anyone can see clearly ahead yet to the long term impact).

For many years, we have been on the record with our view that it would be unproductive to paint all structures and all markets with the same brush and it would appear that many others feel the same way, as witnessed by the good progress being made across the industry to focus on the benefits or additional value to be derived from risk retention, on an asset class-by-asset class or market-by-market basis.  Particularly over the past two years, there has been lots of good work done by lots of smart people from both within the industry and within the various legislative and regulatory bodies that have worked hard over the past several years to get up to speed on the workings of these complex, yet systematically vital, instruments.

As we turn the corner into the first months of 2016 and these rules either start to come on line or as we get closer to key implementation dates, we should be able to see exactly how the risk retention rules for CLOs and US RMBS hold up, for good or for worse.  The impact on the euro market will probably continue to lag behind, consistent with the general lack of regulatory clarity and the resulting weakness in the that market’s recovery.  Nevertheless, there seems to be enough momentum among European regulators to suggest that we should also see some tangible finality to their approach to risk retention sometime soon.  We only hope that they too will acknowledge the need to drill down into individual asset classes and structural types, to match the progress we have already witnessed in other markets.

In any event, we suspect that by the time we get to end of 2016, we will all know much more about how risk retention helps or hurts the global structured finance markets.

About markferraris
Managing Principal Orchard Street Partners LLC

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