Securitisation and Regulation News

Report to the Congress on Risk Retention October 2010 (2)

The study defines and focuses on eight loan categories and on asset-backed commercial paper (ABCP).

For each asset class, the study provides background information, including: a discussion of the economics of securitization, a summary of the underlying collateral, and differences in the securitization “chain” linking originators to investors.

The study defines and examines by asset class a number of mechanisms that may improve the alignment of incentives, mitigate credit risk, or both. These mechanisms include retention of securities or underlying loans, overcollateralization, subordination, third-party credit enhancement, representations and warranties, and conditional cash flows. All of these mechanisms involve the securitizer, the originator, or some other party to the securitization process retaining an economic exposure to a securitization.

Rulemakers should consider whether these mechanisms are acceptable forms of credit risk retention.

The study also addresses the interaction of credit risk retention and accounting standards, including FAS 166 and 167.

Report to the Congress on Risk Retention