A Fitch report suggests the securities market needs to be aware of how pending U.S. risk retention regulations compare to European Union laws and how they are expected to affect the behavior of issuers and investors.
The bottom line is a necessity for “careful navigation” by securitization market participants of key features of the proposed U.S. rules “primarily resulting from the Dodd-Frank Act.”
Assessments by the rating agency's “U.S. Securitization Risk Retention Rules” report indicate that these pending risk retention rules could change the “securitization market dynamics.”
Fitch finds the Dodd-Frank's breakdown of the various risk retention options available to U.S. issuers lead them to “most likely” make decisions based on the outcome of the retention calculations and related capital charges.
Fitch supports a better alignment of issuer and investor interests by requiring issuers to retain some 'skin-in-the-game' and learn from regulation implemented by the European markets.
The report suggests that there is potential for damaging conflict between Dodd-Frank and rules already implemented by European Union regulators. So pending rules may need to take into consideration their effect on global markets.
According to Fitch differences in the U.S. and EU approaches, especially “contradicting or overlapping rules among different U.S. regulators” along with variations in the treatment of asset classes “are creating confusion” among market participants and even increasing the potential for unintended consequences. For example, risk retention calculations vary by asset class and differentiate between residential and commercial mortgage securitizations.
Despite similarities key differences between the U.S. and EU approaches to risk retention “differ significantly” in their focus. The U.S. rules are aimed at issuers and the EU rules aimed at investors creating “a concern that there is not a level playing field between securitization market participants in different jurisdictions.”
The report offers examples of the retention calculations “and how they may drive issuer and investor behavior.”
