Glossary

Risk Retention

Also known as: Credit Risk Retention, Risk Retention Rule

The Dodd-Frank requirement that a CMBS or CRE CLO sponsor (or a qualifying third-party purchaser) retain at least 5% of the fair value of the securitization's credit risk, structured as a vertical slice across all classes, a horizontal first-loss piece, or an L-shaped combination of both.

Enacted to align securitization sponsors' incentives with investors after the 2008 crisis, risk retention rules require the retained interest to be held (with limited exceptions) for a minimum period and generally prohibit hedging or transferring it away during that time. In practice, most CMBS conduit deals satisfy the requirement through the "third-party purchaser" option, where the B-piece buyer purchases an eligible horizontal residual interest sized to at least 5% of fair value and holds it unhedged for the required period, allowing the loan-selling banks to avoid retaining risk on their own balance sheets. CRE CLO sponsors more commonly use a vertical or L-shaped retention held directly by the collateral manager or an affiliate, since CRE CLOs typically lack a distinct third-party B-piece buyer market comparable to conduit CMBS.