CaseMark Structuring Risk Retention Compliance
Designs risk retention structures meeting US and EU requirements with vertical, horizontal, and L-shaped retention options.
When To Use
- Structuring a new securitization (CLO, RMBS, CMBS, ABS, CRE-CLO) and selecting the retention form
- Evaluating whether a sponsor, originator, or majority-owned affiliate qualifies as the retaining party
- Comparing US Regulation RR (17 CFR Part 246) retention options against EU Securitisation Regulation (EU 2017/2402, Articles 6-8) requirements
- Assessing whether an exemption applies (e.g., Qualified Residential Mortgages, qualifying CRE loans, ABCP conduit exemptions)
- Reviewing an existing retention structure for ongoing compliance after portfolio changes or refinancing
Inputs To Gather
- Transaction type: CLO, RMBS, CMBS, consumer ABS, ABCP, or other; open-market vs. balance-sheet
- Jurisdictional scope: US-only, EU-only, or dual-compliance (cross-border placement)
- Sponsor / originator identity: Entity holding the retention interest; ownership chain to confirm majority-owned affiliate status if applicable
- Capital structure: Tranche sizes, credit enhancement levels, par amount of the securitized pool
- Asset pool characteristics: Asset class, weighted-average credit quality, delinquency/default data, QRM/QCRE eligibility indicators
- Retention preference: Vertical (pro-rata slice), horizontal (first-loss piece), L-shaped (combination), or originator retention under EU rules
- Hedging and transfer restrictions: Any planned hedging of credit risk on retained positions; transfer timing constraints
- Fair value data: Third-party or model-based fair value of the horizontal residual interest at closing [VERIFY]
Workflow
Classify the transaction and identify the applicable rule set
- Determine whether US Reg RR, EU Securitisation Regulation, or both apply based on investor base and placement jurisdiction
- Identify the "securitizer" (US) or "originator/sponsor/original lender" (EU) responsible for retention
- Confirm the retaining entity satisfies the definition — trace ownership for majority-owned affiliates [VERIFY]
Calculate the minimum retention amount
- US Reg RR: 5% of the aggregate fair value of all ABS interests issued, calculated at closing
- EU Article 6: 5% material net economic interest, measured on an ongoing basis (not just at closing)
- For dual-compliance deals, compute both and apply the more restrictive measurement methodology
Select and structure the retention form
- Vertical strip (US Option A / EU Article 6(3)(a)): Retain not less than 5% of each class of ABS interests issued. Simplest to implement; retainer bears losses proportionally across the capital structure
- Horizontal residual interest (US Option B / EU Article 6(3)(d)): Retain a first-loss position equal to at least 5% of fair value. Concentrates risk; requires fair value determination of the residual [VERIFY fair value methodology]
- L-shaped (US Option C): Combination of vertical and horizontal where the sum of the two components equals or exceeds 5%. Provides flexibility to calibrate first-loss exposure versus pro-rata risk
- EU originator retention (Article 6(3)(c)): Randomly selected exposures retained on originator balance sheet — not available under US rules; relevant for ABCP and trade-receivable deals
- Seller's interest (US revolving pool option / EU Article 6(3)(e)): Originator retains the seller's interest in a revolving master trust. Applicable to credit card and auto-loan securitizations
Evaluate exemptions and safe harbors
- QRM exemption (US): If 100% of pool assets are Qualified Residential Mortgages, full exemption from retention [VERIFY QRM criteria against current CFPB/OCC definition]
- Qualifying CRE loan exemption (US): Reduced or eliminated retention for loans meeting LTV, DSCR, and amortization thresholds
- ABCP conduit exemption (US): Available if the conduit sponsor provides full liquidity support
- EU exemptions: STS (Simple, Transparent, and Standardised) designation does not eliminate the 5% requirement but may alter disclosure obligations [VERIFY STS eligibility under current EBA technical standards]
Document hedging and transfer restrictions
- US: The retaining party may not hedge or transfer the credit risk of the retained interest for the life of the transaction (with narrow exceptions for interest rate and currency hedging)
- EU: Similar prohibition — no credit risk mitigation, short selling, or hedging of the retained interest. Ongoing compliance monitoring required
- Flag any proposed hedge overlay for legal review to confirm it does not constitute impermissible credit risk transfer
Address ongoing compliance monitoring
- EU requires continuous maintenance of the net economic interest — not merely at closing. Build a periodic recalculation mechanism for amortizing or revolving pools
- US is generally a closing-date test, but any transfer or restructuring of the retained interest triggers re-evaluation
- Confirm disclosure obligations to investors: US Rule 17g-5 / Reg AB II requirements; EU Article 7 transparency templates
Output
Produce a Risk Retention Compliance Memo containing:
- Retention structure summary: Form selected (vertical / horizontal / L-shaped / other), retaining entity, and calculated retention amount with supporting math
- Regulatory basis: Specific statutory and regulatory citations (Reg RR section, EU Securitisation Regulation article)
- Exemption analysis: Whether any exemption applies, with criteria-by-criteria confirmation or shortfall identification
- Hedging and transfer restriction schedule: Permitted and prohibited actions for the retaining party over the life of the deal
- Ongoing compliance obligations: Monitoring cadence, recalculation triggers, and disclosure requirements
- Risk factors / open items: Any unresolved questions marked [VERIFY], assumptions requiring sponsor confirmation, or items requiring external counsel sign-off
Quality Checks
- Retention percentage calculation cross-checked against both the par-based and fair-value-based methodologies where applicable
- Retaining entity eligibility verified through ownership chain analysis — not assumed from deal documents alone
- Dual-compliance deals confirm the structure satisfies both US and EU requirements simultaneously, not just the home jurisdiction
- All exemption claims supported by asset-level data or portfolio-level certifications, not summary representations
- Hedging restriction analysis reviewed against the specific retained interest (not the sponsor's broader portfolio)
- Every jurisdiction-dependent or regulation-dependent assertion tagged with [VERIFY] where the applicable rule may have been amended after the model's knowledge cutoff