Esma is missing a trick with the CLO market
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Esma is missing a trick with the CLO market

Close-up of a mime performing magic trick

It's nice to simplify disclosure templates for CLO managers, but real support for non-IG borrowers starts elsewhere

In a few weeks, the European Securities and Markets Authority (Esma) will conclude its consultation on simplified disclosure templates for private securitizations. EU regulators consider CLOs to be private, even if market participants tend to think of them as public deals.

Being an issuer of a private securitization comes with a duty to disclose detailed loan-level data to the regulator in the name of transparency, which would be reasonable if the buy-side used it — but CLO investors get tailored reports on each deal. The granular disclosures are a nuisance for European CLO managers and impossible for some US firms, who must comply with them if they want to sell to EU investors.

Esma’s consultation presents a few options, but the most likely outcome is that a few years from now, managers will be able to disclose deal-level data through simpler templates. This is what the market has been expecting since a European Commission report from October 2022.

It’s nice that Esma wants to make CLO managers’ lives easier, but the consultation is not exactly a radical step to unleash the funding power of securitization.

A much more interesting project would be to expand the scope of deals that qualify for the “simple, transparent and standardised” stamp. It is fair enough that it does not apply to actively managed deals, but what about static CLOs?

CLOs have proven themselves as safe investments since the financial crisis, and they provide funding to around 70% of non-investment grade companies in Europe, according to M&G. Yet they are excluded from beneficial capital treatment because of requirements around loan maturities that were meant to keep CMBS out of the STS framework.

If Esma is serious about no longer being securitization's wicked stepmother, this would be a place to start.

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