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An eligible horizontal cash reserve account held by a trustee in cash and cash equivalents also can be utilized.
The rules include special risk retention alternatives for revolving-pool securitizations, asset-backed commercial paper conduits, CMBS, government-sponsored enterprises, open market collateralized loan obligations and qualified tender option bonds.
The market has generally concluded that most of the other exemptions for qualifying loans are not workable or sufficiently beneficial to be relied upon.
For instance, the rules provide an exemption for qualifying automobile loans that may never be used because it requires loan characteristics, derived from the QRM definition, that are not common for auto loans.
Credit risk retention rules are intended to promote an alignment of interests between sponsors and investors of securitizations by requiring sponsors to maintain “skin in the game” — that is, retain a certain percentage of the credit risk of the securitized assets.
On December 24, 2016, the rules, mandated by the Dodd-Frank Act, will become effective for all classes of asset-backed securities.
Yet the intended simple solution is a blunt instrument that is causing problems for certain types of asset-backed securities, including commercial mortgage-backed securities (CMBS) and collateralized loan obligations (CLOs), and some are mounting legal and legislative challenges to modify the rules.
There also are exemptions for certain types of assets and transactions, most significantly an exemption for qualified residential mortgages (QRMs).