On July 29, 2026, the U.S. Securities and Exchange Commission's (SEC) Office of Structured Finance issued an interpretive letter confirming that securities issued in data center securitizations (DCS) are not an “asset-backed security” (ABS) within the meaning of Section 3(a)(79) of the Securities Exchange Act of 1934.
Market participants have historically complied with Exchange Act ABS requirements, principally due to uncertainty in the reference to “a lease” in Section 3(a)(79), despite the substantial differences between DCS structures and the types of transactions the statutory definition was intended to encompass. The DCS letter eliminates a key source of uncertainty and is expected to have meaningful consequences for compliance burdens, transaction economics, and securitization structuring decisions.
The Staff’s Determination
In the DCS letter, the staff concurred with a request that fixed-income securities issued in data center securitizations are not asset-backed securities as defined in Section 3(a)(79) of the Exchange Act.
The determination rests on two core conclusions. First, data center facilities are tangible, physical assets that endure beyond the tenor of the securities and may appreciate in value. They are not “self-liquidating financial assets” that “by their terms convert into cash within a finite time period.” Second, payments to investors depend on operational cash flows (revenue less operating expenses such as taxes, insurance, electricity, repairs, maintenance, and security), not on the liquidation of financial assets. The issuer’s ability to service securities depends in significant part on the effectiveness of the operator in managing expenses.
The DCS letter is notable as the first formal staff concurrence addressing a widely issued operating-asset securitization. Unlike the whole-business securitization context, in which market participants have relied on counsel opinions rather than staff confirmation to conclude their securities fall outside the Exchange Act’s ABS definition, the DCS letter provides explicit staff-level certainty for data center securitizations.
Regulatory Implications
The determination that DCS securities are not Exchange Act ABS removes DCS transactions from the scope of the following regulatory requirements:
- Regulation AB (Items 1100–1125 of Regulation S-K). DCS issuers have no obligation to provide the detailed pool-level disclosure, ongoing reporting on Forms 10-D and 10-K, Form ABS-EE filings, or shelf registration requirements that apply to ABS offerings under Regulation AB.
- Credit Risk Retention Rules (Regulation RR). DCS sponsors are not required to retain a 5% economic interest in the securitized assets under the credit risk retention rules implementing Section 941 of the Dodd–Frank Wall Street Reform and Consumer Protection Act. This eliminates a significant structural constraint and may reduce transaction costs and improve execution flexibility.
- Rule 15Ga-1 (Repurchase Demand Reporting). DCS securitizers have no obligation to report on fulfilled and unfulfilled repurchase demands related to asset-backed securities.
- Rule 15Ga-2 (Third-Party Due Diligence Reporting). Providers of third-party due diligence services for DCS transactions are not required to furnish written certifications of their findings to the issuer or file Form ABS-15G with the SEC.
- Conflict of Interest (Rule 127B). DCS transaction parties are no longer subject to the one-year prohibition on transactions creating material conflicts of interest with investors, added by Section 621 of the Dodd–Frank Act.
DCS vs. SASB CMBS: A Critical Distinction
The DCS letter applies only to DCS structures where the issuer directly owns data center facilities through asset entities. It does not extend to single-asset, single-borrower commercial mortgage-backed security (SASB CMBS) transactions involving data centers, and the resulting regulatory divergence is significant.
Historically, the choice between ABS and CMBS structures was driven principally by commercial considerations, including investor demand, relative pricing, and the characteristics of the underlying assets. The DCS letter introduces a significant new regulatory consideration that may influence that determination.
DCS transactions are now outside the scope of the Exchange Act ABS regime, including Regulation RR risk retention, Exchange Act reporting, and conflict-of-interest restrictions, while SASB CMBS involving the same underlying data center assets remains subject to the full regulatory stack. Accordingly, the resulting compliance and execution cost differential may become a significant factor in sponsors’ structuring decisions.
The ABS master trust format, which has been used in most DCS transactions, permits multiple series issuances from a common platform, facilitates the addition of data center assets as portfolios expand, and supports repeat refinancing transactions without the need to establish a new securitization entity for each issuance. SASB CMBS transactions, by contrast, typically finance a single asset or a discrete portfolio and generally provide less flexibility for the ongoing addition or substitution of collateral.
As a result, the combination of the scalability inherent in the master trust structure and the regulatory consequences of the DCS letter may further enhance the attractiveness of DCS structures for operators with expanding multisite portfolios. This may also blunt the trend toward convergence of ABS and CMBS structures in data center financings. Nevertheless, SASB CMBS may remain an attractive financing alternative for large single-facility transactions, particularly when the value proposition of a real estate financing structure, established CMBS execution channels, and dedicated CMBS investor demand outweigh the benefits of a DCS structure.
Key Takeaways
- The DCS letter provides long-sought regulatory certainty for a market that has operated under compliance uncertainty since its inception.
- DCS sponsors are no longer required to comply with risk retention rules, potentially reducing transaction costs and improving execution flexibility for future issuances.
- The relief is structure-specific: SASB CMBS remains fully regulated as Exchange Act ABS and is subject to the same requirements.
- The DCS letter is not a rule or regulation, and materially different structures or facts could yield a different conclusion.
Open Questions and Future Developments
Several open questions remain. The DCS letter is limited to its specific facts, and variant structures (e.g., DCS with lease-only revenue profiles, GPU and bare-metal securitizations, or limited-role operators) must be assessed independently. The SEC’s Concept Release on Residential Mortgage-Backed Securities Disclosures and Enhancements to Asset-Backed Securities Registration could revisit the definitional boundary in future rulemaking. And hybrid structures blending direct asset ownership with mezzanine lending or preferred equity may attract future staff attention.
If you have any questions about this no-action relief and its implications for data center financing transactions, or would like additional information, please contact B.K. Lee or one of the attorneys on our Structured & Warehouse Finance or Data Centers teams.
If you have any questions, or would like additional information, please contact one of the attorneys on our Finance team.
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