LIBOR and EU Securitization Changes

Two major regulatory changes will significantly affect collateralized loan obligations (CLOs): the phasing out of support for LIBOR in 2021 and the European Union Securitization Regulations, which came into effect in January 2019. These changes will affect borrowers of capital, investment managers who securitize loans, investors in CLOs, and activity of trustees in this market. As markets prepare to transition away from LIBOR, the Fed’s Alternative Reference Rates Committee has established the secured overnight financing rate (SOFR) as its recommended benchmark interest rate. A collateral manager’s transition to using SOFR may require the assistance of a trustee to navigate the change. The EU Securitization Regulation imposes new standards of transparency, risk retention, and due diligence for issuers of and investors in securitizations. The new regulation will affect issuers of securitizations in any jurisdictions that market their products to investors in the EU. With a changing market, collateral managers and trustees should be prepared with language and systems in place to manage the transitions they may face. Ensuring that all parties are informed and prepared will abate market uncertainty and provide continuity. TOPICS: CLOs, CDOs, and other structured credit; legal and regulatory issues for structured finance; financial crises and financial market history Key Findings • As markets prepare for a transition away from using LIBOR as the benchmark interest rate, the Fed’s Alternative Reference Rates Committee has established the secured overnight financing rate as its recommended alternative. A collateral manager’s transition to using SOFR could be challenging and may require the cooperation of a trustee in navigating the change. • The EU Securitization Regulation, which came into effect in January 2019, imposes new standards of transparency, risk retention, and due diligence for issuers of and investors in securitizations. The new regulation will affect issuers of securitizations in any jurisdictions that market their products to investors in the EU. • With a changing market for CLOs, collateral managers and trustees should be prepared with language and systems in place to manage the transitions they may face proactively. Ensuring that all parties are informed and prepared will help to abate market uncertainty and provide continuity.