This article is reprinted with permission from TreppTalk.

The commercial mortgage–backed securities (CMBS) market is almost five full months into the risk retention era. Implemented as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the regulation’s impact on the market has already been profound.

In a nutshell, the rules require that issuers retain a piece of risk from every transaction they issue. They can keep a vertical slice equal to 5 percent of a deal’s face (or par) value, a horizontal slice equal to 5 percent of a deal’s market value, or a combination of the two. While they can sell the horizontal slice, the buyer cannot leverage, hedge, or trade out of the position at any point in the transaction’s life.

So, the rules effectively toss a monkey wrench into the market, in that the risk pieces are no longer liquid. That, of course, comes with a price.

For instance, investors in the horizontal slices are pricing the bonds they’re buying at levels that would provide them with yields of more than 18.6 percent, depending on how high up the capital stack they climb. Of course, part of that premium is due to the illiquidity of the investments. The thinking behind that stemmed from B-piece buyers pricing their investments at yields in the low to mid-teens in the pre–risk retention world.

While the rationale was that loan coupons would increase by perhaps 50 basis points as a result, little evidence exists that borrowers of securitized loans are being penalized that much, or at all.

What is certain is that the CMBS business has become more concentrated, so the sector’s most dominant players are those who have benefited most from the rules. Some may say that is the way it has always been, but that is not quite true.

Let’s use 2015 as an example. Thirty-eight lenders contributed loans to the CMBS market that year, with the five most active firms accounting for 43 percent of the $93.6 billion in contributions. The top five lenders still made up a sizable chunk of the debt in that period, but not as much as what we’ve seen in 2017 year-to-date (YTD).

So far this year, only 21 lenders have participated in the sector. And the top five lenders—Goldman Sachs, JPMorgan, Morgan Stanley, Deutsche Bank, and Citigroup—have accounted for more than 61 percent of the volume.

While a small number of other players are likely to jump in and contribute to the CMBS market (Ladder Capital Corp. is among them), it is highly unlikely that the sector will feature anywhere near 30 contributors this year.

Some might argue that when too many players compete in a lending market, credit underwriting standards typically suffer as lenders fight for loan opportunities, even though they all face similar costs of capital. But others will note that costs typically increase in any industry that becomes overly concentrated in a few hands. If that is true, it would be the borrowers who suffer.

Meanwhile, CMBS issuance volume has remained tepid despite a recent surge. Through last Friday, 29 deals totaling $21.5 billion had priced. That compares with 38 deals totaling $26 billion during the same time last year, when issuance was hobbled by market volatility. During the same period in 2015, 51 deals totaling $42 billion were issued.

While issuance is starting to perk up as industry players adjust to the new rules, what is certain is that the CMBS playground has become more concentrated. Those most capable of dealing with the rules—big banks—are benefiting the most from this smaller pool of lenders.

* TREPP-i Survey Loan Spreads levels are based on a survey of balance sheet lenders. For more information, visit Trepp.com.