Japanese Risk Retention: JFSA Favors Diligence Over Disruption
March 15, 2019
The new Japanese Risk Retention Rules will lead to increased loan and collateral manager due diligence by Japanese investors but not wholesale changes to the CLO market.
Background
On March 15, 2019, the Japanese Financial Services Agency (the “JFSA”) published final rules and FAQs responding to comments on proposed changes in the regulatory capital requirements applicable to Japanese banks and certain other financial institutions that invest in securitization transactions (respectively, the “JFSA Final Rules”, “JFSA FAQs” and “JFSA Proposed Rules”). The JFSA Final Rules are intended to coordinate risk retention requirements with those in effect in other major financial markets around the world.
The major takeaway is that there is a path forward for CLOs which does not include a Japanese risk retention obligation based on a determination by the affected Japanese investors that the underlying loans were not “inadequately formed.” Thus, the JFSA Final Rules will lead to increased loan and collateral manager due diligence by Japanese investors but will not result in wholesale changes to the CLO market.
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