As the CLO market continues to thrive this year in both the EU and US lawmakers and regulators continue to express concern over systemic risk within CLOs. From the SEC Enforcement Actions and the introduction of FATCA over the earlier part of the last decade, right through to the impact of 2018’s key regulatory initiatives, MIFID II and the European Securitisation Regulation, it is clear that doubts persist in the minds of regulators who continue to pursue increased oversight of CLOs as a product.
Increased Incremental Regulation
As the grip of regulators has gotten tighter over the last number of years, the special purpose vehicles (“SPV”) used by issuers and more particularly the directors of those same entities have been burdened with a far broader scope of responsibility than was once the case. Their role can no longer be described as passive, as exposure to a more substantial degree of risk is the result of the ongoing layering of CLO regulation. We describe this gradual and incremental burdening of the SPV itself and the CLO industry more generally in detail below, showing just how focused regulatory activity in this area has been over the years and continues to be.
Market participants would agree that fears CLOs should have better tabs kept on them persist as a consequence of legacy associations with lesser performing and fundamentally differing asset classes during the financial crisis, when in fact and as per the below, the CLO industry is currently subject to more than its fair share of oversight.