London’s CLO managers are set to get clarity from regulators about how skin-in-the-game rules will work after Brexit.
In the arcane world of securitization regulation, Brexit has thrown doubt onto whether U.K.-based managers of collateralized loan obligations can keep being “sponsors” or have to fall back on the “originator” designation meant for managers from outside the Europe Union. [...]
Christian Moor, a policy officer at the European Banking Authority with a focus on capital markets and structured finance, told Bloomberg News he expects there will be a “question-and-answer” published by the end of the year to clear up the uncertainty. A Q&A is an online database in response to queries from the market to ensure consistent and effective application of the new rules, though they are not legally binding. [...]
Risk-retention rules were introduced in the wake of the financial crisis and are laid out in the Capital Requirements Regulation (CRR). Managers must retain 5 percent of a transaction for the life of the vehicle. MiFID regulated entities or investment firms can do this as a “sponsor,” while those from outside have to use the “originator” method, requiring them to take an additional step of originating a certain portion of assets onto their own balance sheet before selling them on to the CLO vehicle.
U.K. managers can currently qualify as sponsor entities by passporting into the EU regime, but after a Brexit -- where the U.K. loses access to the single market and is unable to establish an equivalency regime -- these managers will lose their passporting rights, shutting down the sponsor route for them.
Managers have so far coped with the uncertainty over which option to take by inserting language in their documentation to allow for a switch, or by changing their method of risk retention. That sparked a shift away from the sponsor option to originator CLOs, and this year’s issuance shows the European market split about 50:50 between the two structures. [...]
While EBA’s Moor acknowledges the wider sponsor remit under the new rules, he is also aware of the confusion created by the drafting. The Q&A is intended to help address these layers of uncertainty.
“Compared to the sponsor definition under the current CRR regulation, which states that sponsors have to be MiFID regulated entities, the definition under the securitization regulation is wider,” Moor said.
Moor added that there is “confusion” because in the new regulation the reference to “investment firms” does not address their location, whether situated in the EU or not. It does, however, cross-reference the MiFID II definition of investment firm, according to Moor.
This opens up a debate as to whether such firms, including CLOs, should be MiFID regulated or if the clause is merely laying out the general parameters of an investment firm--and so allowing for them to be located in a non-EU country. [...]
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