White Paper No. 46

Skin-in-the-Game in ABS Transactions: A Critical Review of Policy Options

In response to the financial crisis, as a way to align incentives of originators and investors,

new regulation in the US (Dodd-Frank) and the EU (CRR) requires issuers of asset backed

securities to hold some skin-in-the-game, offering a set of options for risk retention. We

propose an intuitive metric exposing effective risk retention and demonstrate that it varies

widely across the available retention options. Requiring open disclosure of the metric, rather

than demanding choice among arbitrarily specified and dissimilar retention options, would

allow markets to price retention properly, and issuers to choose their desired retention level