RISK: To Retain or Not Retain in Sukuk?

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Introduction -

17 C.F.R. Part 246, adopted jointly by the United States Securities and Exchange Commission (the “SEC”) and other federal agencies in October of 2014 (the “U.S. Risk Retention Rule”) was adopted in response to the requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). The risk retention regime in relation to residential mortgaged-backed securities came into effect in December 2015 and, on December 24, 2016, the final rules implementing the risk retention regime for all other asset-backed securities came into effect in the United States.

In an effort to comply with the U.S. Risk Retention Rule, the prospectus disclosure of the recent Kingdom of Saudi Arabia (the “Kingdom”) Trust Certificates Issuance Programme (the “Saudi Trust Certificates Programme”), established as a U.S. Rule 144A Programme, provided that 5 percent of the issue size of each issuance under the Saudi Trust Certificates Programme would be held by the sovereign for risk retention purposes. As a result, the inaugural issuance of US$9 billion under the Saudi Trust Certificates Programme required the Kingdom to purchase and retain US$450 million of its own trust certificates, and to hold this amount for the entire tenor of the instrument, in accordance with provisions of the U.S. Risk Retention Rule. Against this backdrop, an in-depth discussion has taken place amongst sukuk industry practitioners around the subject of risk retention in sukuk issuances more generally, in particular whether compliance with the U.S. Risk Retention Rule is actually required for the asset class.

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