Court of Appeals Questions Calculation of CLO Credit Risk

Last Thursday, February 11th, the US Court of Appeals for the District of Columbia Circuit ("DC Circuit") questioned how the credit risk of a Collateralized Loan Obligation (“CLO”) should be calculated during oral arguments for a request by the Loan Syndications and Trading Association (“LSTA”) to review the risk retention rules and their application to CLOs, according to a recent Reuters’ article.

The DC Circuit requested an explanation of how credit risk should be calculated, and asked technical questions about how a CLO works. The court also asked whether it has jurisdiction to decide the case and whether managers should be required to hold 5 percent of the investment fund comprising the CLO or 5 percent of the equity tranche.

In January 2014, SFIG, the Securities Industry and Financial Markets Association, and the LSTA submitted a comment letter to regulators encouraging a compromise to the 5 percent of the fund proposal with a so-called qualified CLO structure, where managers retain 5 percent of the equity.

The DC Circuit is still considering the question of jurisdiction and if they choose not to transfer the case, according to Reuters, they may release a decision around July.

Terms and Conditions | Privacy Policy