The bill, on which the market is placing all its hopes, is H.R.4166, which would relax risk retention requirements on CLOs through the creation of qualified CLOs (QCLOs).
In order to qualify as a QCLO, a CLO would have to adhere to a series of best practices across six different categories including quality of assets and adequate portfolio distribution.
Any issuer of a CLO would then satisfy US risk retention by retaining 5% of the equity, rather than 5% of the total value of the deal.
Meredith Coffey, executive vice president of research and analytics at the Loan Syndications & Trading Association, told conference delegates attending the ABS East conference in Miami that given the pre-election political environment, a vote during a lame duck session is the best hope the legislation has of making it through Congress, though challenges remain.
“We are trying to get this done in a lame duck session but I wouldn’t bet my business on the QCLO being done by the end of the year,” Coffey said during a panel on risk retention.
Senator Elizabeth Warren (D-Mass.) poses the biggest threat to the bill’s passing Congress, said sources in Washington.
It is understood that there are prominent Democrats in the Senate who support the idea of easing risk retention requirements for CLOs, but few are willing to stick their heads above the parapet to take on Warren, who has publicly eviscerated anyone seeking to roll back provisions laid out in Dodd-Frank.
This means that while the bill — which is expected to easily pass through the House if it comes to the floor — would enjoy plenty of Republican support in the Senate, Democrats would likely use strategic procedures like putting a hold on the bill to block it in the Senate.
That means that six Democratic Senators out of 44 would need to cross the aisle and vote with the Republicans in order for the bill to pass.
Given Senator Warren’s influence among her party, though, it is far from certain that six Democrats would be willing to help the QCLO become law.
But there are other ways to solve the risk retention conundrum.
LSTA is also in the process of suing the Federal Reserve and the Securities and Exchange Commission over the implementation of risk retention for CLOs.
Coffey said that the LSTA hoped to hear back from the judge of the US District Court soon, but noted that the case would likely then be appealed, meaning that litigation was not “a near term solution”.