What is the Mechanism of Risk Retention Rules?

The mechanism typically involves the originator holding a specified percentage of the underlying securitized asset pool or retaining junior tranches that absorb first losses. In a blockchain context, this might be implemented by smart contracts that lock a portion of the originator's capital or mandate participation in a specific risk-bearing tranche. Auditable on-chain records ensure compliance and transparency regarding the retained risk.

What is the Methodology of Risk Retention Rules?

The strategic approach for implementing risk retention rules centers on fostering responsible origination practices and enhancing investor confidence in securitized digital assets. Methodologies include structuring securitization vehicles with explicit risk-sharing mechanisms, performing thorough due diligence on underlying assets, and ensuring transparent reporting of retained exposure. The objective is to prevent the creation and distribution of low-quality assets by ensuring that originators bear a direct financial consequence for poor underwriting.

Risk Retention Rules

Meaning

Risk Retention Rules, within crypto finance and structured products, refer to regulatory requirements mandating that originators or sponsors of certain securitized digital assets or crypto-backed loans retain a portion of the credit risk. This requirement aims to align the interests of the originator with those of investors, mitigating moral hazard by ensuring the originator has direct financial exposure. It applies to assets like tokenized debt or DeFi lending pools.

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▴Cross-Border Compliance

▴Risk Retention

▴Horizontal Retention

Can a Single Risk Retention Structure Satisfy Both Us and Eu Regulators in All Cases?

A single risk retention structure cannot satisfy both US and EU regulators due to fundamental differences in enforcement and measurement.

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▴Article 7 Transparency

▴Extraterritorial Effect

▴Due Diligence

How Does the Eu Sts Framework Alter the Compliance Burden for a Us Issuer?

The EU STS framework transforms compliance for a US issuer from a domestic regulatory mandate into a strategic, market-driven imperative.

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▴Horizontal Retention

▴Fair Value

▴CMBS

How Does Risk Retention Affect the Pricing of Asset Backed Securities?

Risk retention aligns originator and investor interests, embedding a signal of asset quality directly into the security's price.

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Risk Retention Rules

Meaning

Mechanism

Methodology

Can a Single Risk Retention Structure Satisfy Both Us and Eu Regulators in All Cases?

How Does the Eu Sts Framework Alter the Compliance Burden for a Us Issuer?

How Does Risk Retention Affect the Pricing of Asset Backed Securities?

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