Pending U.S. risk retention regulations require "careful navigation" by securitization market participants, according to a Fitch Ratings report. The report called U.S. Securitization Risk Retention Rules released by Fitch today looks at the potential effect that pending risk retention rules can have on securitization market dynamics and how U.S. requirements compare to rules already implemented by European Union (EU) regulators. "Conflicting U.S. and EU approaches, contradicting or overlapping rules among different U.S. regulators and varying treatment of different asset classes are creating confusion among market participants and increasing the potential for unintended consequences," said Kevin Duignan, group managing director for U.S. structured finance at the rating agency. "Securitization market participants seek a better understanding of how global regulators are approaching the complex issue of risk retention." Fitch said it remains supportive of aligning issuer and investor interests by requiring issuers to retain some 'skin-in-the-game.' The report highlighted key features of the proposed U.S. rules — primarily resulting from the Dodd-Frank Act — including a breakdown of the various risk retention options available to U.S. issuers and which options they are most likely to choose based on the outcome of the retention calculations and related capital charges. The report also looks at some of the more controversial risk retention proposals including the concept of 'Qualifying Assets' (QA) and the introduction of a premium capture reserve account (PCRA) concept. The QA theory is aimed at recognizing the limited need for risk retention for assets that are of exceptionally high credit quality but determining what represents "high quality" has proven to be contentious.
Others argued that the PCRA rule, which is aimed at limiting the issuer's ability to offset risk retention by recognizing upfront gains, can potentially eliminate most, if not all, of the economic incentive to securitize for many originators.