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”).

The JFSA Proposal is intended to coordinate risk retention requirements with those in effect in other major financial markets around the world. Like the U.S. risk retention rules, the JFSA Proposal in the context of CLOs relates to securitization transactions involving an originator that transfers assets into an issuing entity, and therefore may not apply to “open-market” CLO transactions due to how the assets underlying such transactions are acquired.

Moreover, even if the JFSA Proposal applies to “open-market” CLOs, due to the nature of the assets in a CLO transaction, we believe that the retention requirement of the JFSA Proposal (the “JFSA Retention Requirement”) should not apply pursuant to an exception for securitizations in which the original assets are not “inappropriately formed,” as we describe in this OnPoint.

Based on our discussions with industry participants in the U.S. and Japan, we are optimistic that helpful clarifications will be forthcoming, which will bring greater clarity and focus to the application of these proposed requirements. In the Q&A that follows in this OnPoint, we provide answers to a number of the questions that face the CLO market as a result of the JFSA Proposal...