Japanese investors have become increasingly active in the US, European and Australian securitisation markets in recent years, particularly with respect to CLO and RMBS transactions. The significant investments they make mean arrangers and issuers listen attentively to their requirements. The introduction by the Japanese Financial Services Agency (the "JFSA") of new due diligence rules (the "JDDRs") for Japanese investors therefore commands attention in all the major securitisation markets. The JDDRs are set out in the Financial Services Agency Notices (the "Notices") provided for each category of financial institutions (e.g. in respect of banks, the JDDRs are set out in Article 248 of the “Criteria for Judging Whether A Financial Institution’s Own Capital Is Sufficient in Light of the Assets Held, etc. under the Provision of Article 14-2 of the Banking Law” (Notification No. 19 of 2006, the Financial Services Agency)).
They bear similarities to due diligence and risk retention rules found in the EU and the US, though they diverge in a number of ways, therefore requiring an assessment to be undertaken on a case-by-case basis. The JDDRs will become applicable to banks upon the Notices taking effect on 31 March 2019.
On 15 March 2019, the JFSA released some guidelines and its views on questions made by market participants with respect to the application of the Notices (the "Notice Guidelines"), which alleviates earlier concerns that the JDDRs would exclude Japanese investors from many European and US securitisation transactions by providing that (i) if an investor considers them equivalent on the facts of the relevant rules, compliance with the US rules and/or EU rules will suffice for the purposes of the JDDRs and (ii) certain US securitisation transactions, such as open market CLOs, may not require risk retention for the purposes of the JDDRs. However, many of these deals will need to display triple compliance – with the US rules, the EU rules and, now, the Japanese rules too.