U.S. District Court Ends Risk Retention for CLOs
U.S. District Court Ends Risk Retention for CLOs

Last Thursday, the U.S. District Court for the District of Columbia ordered a summary judgment in favor of the Loan Syndications & Trading Association in their federal lawsuit against federal agencies over risk retention rules. As reported in Asset Securitization Report, the action came after an order by the U.S. Court of Appeals to vacate, which stemmed from a Feb. 6 ruling “by a three-judge appeals court panel that the standards should not apply to investment managers of CLOs.” This ruling was a reversal of the district court’s prior ruling upholding risk retention standards.

The article adds that federal agencies have until May 10 to appeal the decision with the U.S. Supreme Court “but CLO industry observers do not expect the [Federal Reserve Board] or the [Securities Exchange Commission] to follow through.” The appellate court’s notice to vacate came “after regulators failed to file an appeal against the upper court’s decision by the March 26 deadline.”

The ruling frees managers of open market CLOs from the risk retention requirements. However, it is also important to note that the ruling “does not prohibit managers from retaining risk,” so it is possible that some managers may choose to do so.

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