Risk retention requirements for CLO managers

Published: 12 February 2018

The US Court of Appeals for the D.C. Circuit has ruled that open market CLO managers are not subject to risk retention requirements. Background information and key points from this case are summarised below:

  • Dodd-Frank instructed relevant US agencies to prescribe regulations that require ‘any securitiser’ of an asset-backed security to retain a portion of the credit risk for any asset that the securitiser ‘transfers, sells or conveys’ to a third party, specifically ‘not less than 5 percent of the credit risk for any asset’
  • The regulation implemented by the SEC and Federal Reserve Board of Governors applied these risk retention requirements to CLO managers (Credit risk Retention Rule)
  • The LSTA challenged the SEC’s application of risk retention requirements to CLO managers, arguing that given the nature of transactions performed by CLO managers, the language of the statute does not encompass their activities
  • After hearing arguments from both parties, the US Court of Appeals concluded that the Dodd-Frank risk retention rules cannot be applied to open-market CLO managers as they are not ‘securitisers’ under the statute
  • The court’s decision is not immediately effective and US government has 45 days to decide whether to seek review
  • If finalised, the decision will apply to all US open market CLOs
  • The decision does not apply to balance sheet CLOs and has no impact on parties subject to EU risk retention rules where applicable

The full decision of the Court can be viewed here. If you have any questions please contact Nicholas Smith