This thought paper examines the structural evolution of CLOs post crisis, as well as the issues facing the industry at present. We also put forward an alternative perspective on risk retention.
Collateralised Loan Obligations (CLOs) have evolved considerably over the last decade, with adjustments leading to an evolution of CLO structures to ensure they continue to appeal to investors, as well as fulfilling a useful function in the capital markets.
CLOs have a number of notable features which distinguish them from other classes of securitisation, which we explore in this paper. In addition we examine the current state of CLO regulation in Europe (under the Capital Requirements Regulation (CRR) and the Alternative Investment Fund Managers Directive (AIFMD)), and in the United States (under Dodd-Frank). We also consider how that regulation has evolved and what may be in store for the future.
Finally we examine a number of issues currently facing the CLO industry in Europe and the US, and assess the potential impact of new legislative initiatives such as Simple, Transparent and Standardised (STS) securitisation. We also outline an alternative perspective to tackling the challenge of risk retention faced by CLO issuers, particularly CLO managers who may wish to optimise the capital required to operate their business.
This paper will be relevant to financial institutions and capital markets participants involved or considering involvement in CLO securitisations.
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