CLO buyers could pay for manager’s disclosure failings

Quirks of Europe’s new Securitisation Regulation, which came into force this year and is dominating debate at this year’s IMN/Afme Global ABS conference in Barcelona, could leave CLO buyers carrying the can for failures of CLO managers to meet their regulatory obligations.

Request a PDF

Nick Shiren, a partner at Cadwalader, Wickersham and Taft, said that in a CLO, the issuer itself would be the party that was required to disclose transparency information under Article 7 of the new regulation.

But it needs to source this information from the collateral manager, who holds all the details of the CLO exposures. The issuer typically also indemnifies the manager against breaches of the regulation, meaning that any penalty applied for breaching the rules would come out of investors’ pockets.

“These are the types of issues investors are very alive to, and which have become a negotiating point in recent deals,” said Shiren, speaking on a panel about issues on the regulatory horizons.

Investors have also been heavily split on how to meet the regulation’s requirements, particularly if they’re buying deals from outside the EU.

Securitisation issuers which aren’t EU-regulated, such as US CLO managers, may not comply with the new European disclosure rules, particularly if European buyers are only a small part of the intended audience for the deal.

This gives European investors a difficult choice – stop buying any assets outside the EU at all, require issuers to meet European standards, including new disclosure templates, or take a view that the Regulation shouldn’t apply to these issues. If a US issuer meets US disclosure standards, for some investors, that will be sufficient.

“Investors are having to take their own views as to whether they require that full information, including compliance with the reporting templates, which is very onerous, from US originators,” said Shiren.

“There’s a good argument that the detailed transparency requirements do not apply in every case, and should not apply where none of the entities is established in the EU.”

Laurel Davis, vice president for credit risk transfer at Fannie Mae, said that the GSE’s $50bn in Credit Risk Transfer securities were within scope of the regulation.

“As a US issuer primarily selling to US investors, you would think that there was really no impact of the new EU securitization rules, but actually we started to find that there is quite an impact,” Davis said. “If we look at our issuance, the direct investment from EU investors is relatively small, but what we started to hear from our US investors beginning in the second half of last year was that they had a lot of concern, because they are managing a significant amount of EU money.”

Some investors allocating those funds to Fannie Mae CRT bonds need to ensure that the securities comply with EU regulation. Fannie Mae already voluntarily complies with the risk retention requirement by retaining a vertical 5% of its issuances, Davis said, so meeting the new rules meant primarily complying with the due diligence requirements of the Regulation. Working with London-based Integer Advisors, the Fannie found that it already discloses much of what is required, Davis said.

Formatting that data to make it easy for EU investors to find is a more complicated matter. Fannie provides much of the detail EU investors need on their website, including a mapping guide for loan-level data.

In July, Fannie plans to add an ESMA format to its data dynamics tool, which allows investors to run analytics on the data provided. But, Davis said later in the panel, “the ESMA format isn’t really usable,” even though they will be providing it, due to inherent differences between the requirements and reporting formats of the two jurisdictions.

Nonetheless, Davis said she’s had at least one US investor that manages EU money say it is allocating more money to Fannie Mae because their efforts have made compliance easier. “If it was hard for us [parsing the data and sorting it], it is going to be hard for our investors,” she said. 

Though panellists hoped for further statements from European authorities to clarify these issues, for regulated investors like banks, it is likely to come down to a discussion with the responsible local authority.

“If investors are not getting essentially the same information in the same fashion in different jurisdictions, but the risk profile of the transactions is similar, there’s going to have to be a very interesting conversation with the regulator about that,” said Shiren.