Define: Retention Letter
A Retention Letter is a document used in securitisation and structured finance contracts to confirm that an originator, sponsor, or seller retains a specified net economic interest in a transaction. It is periodically updated to record how the retained interest is maintained, evidencing ongoing compliance with risk retention obligations owed to investors and regulators.
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What Retention Letter Means in a Contract
A Retention Letter is a written confirmation, typically issued by an originator, sponsor, or manager of a financial transaction, stating that a required net economic interest is being held and maintained over time. It functions as an ongoing certification tool rather than a one-off statement, since the retained interest must be preserved throughout the life of the underlying transaction, whether that is a securitisation, a loan pool, or another structured arrangement.
Within a contract, the Retention Letter is usually referenced as a deliverable that must be provided at closing and then refreshed periodically. It gives counterparties, investors, and sometimes regulators comfort that the party responsible for originating or managing the assets has skin in the game, aligning its interests with those relying on the transaction's performance.
The term is closely tied to risk retention frameworks found in finance and securitisation practice, where retaining a minimum percentage of exposure is intended to discourage originators from offloading all risk while retaining none of the consequences of poor underwriting.
How Retention Letter Is Defined or Measured
The substance of a Retention Letter is measured by reference to a defined method of calculating net economic interest, which can be expressed as a percentage of the aggregate nominal value of securitised exposures, a vertical slice across tranches, or another agreed formula. The letter should specify which method applies and confirm the resulting figure at the relevant measurement date.
Contracts often require the letter to be updated whenever the underlying pool changes materially, such as after a top-up of assets, an amortisation event, or a restructuring. Because the retained interest can fluctuate with portfolio performance, the letter functions much like a periodic certificate rather than a static declaration.
- Identification of the retaining party and its role in the transaction.
- The retention method used and the resulting percentage or amount.
- The date as of which the calculation is made.
- Confirmation that no hedging or transfer has undermined the retained interest.
Where Retention Letter Appears in Agreements
Retention Letters most commonly appear as ancillary documents attached to or referenced within securitisation agreements, servicing agreements, and note purchase or subscription documents. They are also relevant in broader Relevant Circumstances
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