On March 15, the day the Japanese Financial Services Agency (the “JFSA”) published its final risk retention rules, Dechert’s CLO team published an OnPoint discussing the new final Japanese risk retention rules and their impact on the CLO market. 

On December 28, 2018, the Japanese Financial Services Agency (the “JFSA”) published a number of notices detailing proposed changes in the regulatory capital requirements applicable to Japanese banks and certain other financial institutions that invest in securitization transactions (the “JFSA Proposal”), which led to speculation about the impact the new rules would have on the CLO market. On March 15, 2019, the JFSA published final rules and FAQs responding to comments (including those made by Dechert) on the JFSA Proposal (the “JFSA Final Rules” and “JFSA FAQs”). Shortly after, Dechert published an OnPoint observing that 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. In our view, there is a path forward for CLOs which does not include a Japanese risk retention obligation so long as affected Japanese investors are able to determine that the underlying loans are not “inappropriately formed.” 

Stay tuned for information on how the JFSA Final Rules might affect other kinds of securitizations.  For more information about the new Japanese risk retention rules, their impact on due diligence and reporting standards followed by Japanese investors, and the different ways investors can determine whether the assets underlying the CLO were “inappropriately formed” or may hold risk retention, check out this Dechert OnPoint authored by members of Dechert’s CLO team: John Timperio, Cindy Williams, Mary Bear, Christopher Desmond, Christopher P. Duerden, Matthew Gauthier, and Kelly A. Nash.