CLO Risk Retention: The Headline Hurts; the Hit, Not So Much

White & Case LLP

More than a year after the Office of the Comptroller of the Currency of the Department of the Treasury, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Securities and Exchange Commission, the Department of Housing and Urban Development and the Federal Housing Finance Agency issued a re-proposal (the “Re-Proposed Rule”) to govern risk retention in asset-backed securities (“ABS”) transactions, on October 21 and October 22, 2014 the regulators voted to adopt final rules (the “Final Rule”) implementing a risk retention regime as mandated by Section 941 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). The Final Rule brings to a close a prolonged period of discussion and lobbying by CLO market participants with the regulators. The Final Rule becomes effective in two years, giving the CLO market time to consider all necessary changes. Of all segments of the ABS industry, perhaps none anticipated the Final Rule with more trepidation than the CLO market, whose members went to great lengths to explain the potentially damaging effects that the Re-Proposed Rule threatened to inflict upon the CLO industry. Now that the Final Rule has been implemented, will the long-term outcome be as dire as CLO market participants feared?

At first glance, the answer to this question may appear to be “yes.” The industry, after all, had its sights on an exemption that would have allowed the market to continue to operate largely as it does currently. However, certain key aspects of the Final Rule should give comfort to the CLO market that its long-term prospects, though not without challenges, remain strong.

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